Risks of Further Dollar Depreciation Against GBP, AUD, EUR

Weekly Bank Research Center 5-14-07



Risks of Further Dollar Depreciation Against GBP, AUD, EUR



Stephen Roach, Head Economist, Morgan Stanley

                                                                                                                                                                                  The G10 crosses have settled in a range.  I still see risks of further dollar                                depreciation, relative to the EUR, GBP and AUD, and believe a weakening US                                   labor market should keep the dollar on its back foot for some time but suspect                               the bulk of dollar depreciation against the majors may be over.  I think                                     investors should consider rotating into a short-dollar position against emerging                             market (EM) currencies.                                                                                                                                                                                                   The main reasons behind my call change are (i) the US economy may have troughed                              and (ii) risk-taking appetite remains buoyant.  This should temper USD                                       bearishness against the liquid G10 anti-dollars but, as the US begins recovery,                              should further enhance the attractiveness of selected EM assets and currencies.                                                                                                                                                                                                                                                         
                                                                                                                                                                                                                                         [Full Story](http://www.morganstanley.com/views/gef/index.html#anchor4874)
                                                                                                                                                                                        

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[/B] [/B] John E. Silvia, Ph.D. Chief Economist, Wachovia

                                                                                                                                                                                  There are good reasons for the ECB to raise rates further. First,                                            incoming data suggest that growth remains solid. As shown in the                                             top chart, growth in German industrial production remains very                                               strong and the stronger-than-expected rise in factory orders in                                              March, coupled with continued high levels of business sentiment,                                             suggest that the production pipeline remains full. Thus, the                                                 Eurozone economy does not need the stimulus of continued low                                                 interest rates. In addition, CPI inflation in the Eurozone is currently                                      close to the ECB?s implicit target of 2 percent (see middle chart).                                          The ECB worries that continued strong growth could eventually                                                lead to rising inflationary pressures. Therefore, it likely will raise                                       rates further to ensure that price stability is maintained.                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                         [Full Story](http://www.wachovia.com/ws/econ/view/0,,3773,00.pdf)
                                                                           
                                                 
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                                                [B]                                                                                                                                                                                      Inflation Report May Not Live Up to Expectations                                                                                                                                                                          

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[/B] [/B] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank

                                                                                                                                                                                                                                                                     Entirely as expected, the Bank of England raised its policy rate by 25bp to                                  5.50% during the week. However, as ever with the BoE, we were left none the                                  wiser about the future direction. The bank did publish a brief press release in                              connection with the interest rate decision which suggested that the bank is not                              particularly concerned about inflation, but one should not attach too much                                   importance to this, in our view. Governor Mervyn King stressed as recently as                                last week that the press release is intended exclusively for journalists, and                                that the BoE does not wish to end up in a situation like the Federal Reserve                                 where so much importance is attached to every single word. So the press release                              cannot be used to assess how the bank will react to future data.                                                                                                                                                          

                                                                                                                                                                                          
                                                                                                                                                                                                                                         [Full Story](http://danskeresearch.danskebank.com/link/WeeklyFocus11052007/$file/WeeklyFocus.pdf)
                                                                           
                                                 
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[/B] [/B] Steve Chan, Economist, TD Bank Financial Group
A Canadian dollar in motion tends to stay in motion unless acted upon by an outside force. For Canada, those important forces are energy prices, non-energy commodity prices, and interest rates. From May 2005 to May 2006, the Canadian dollar marched from 79 cents against the U.S. dollar to 91 cents, supported by the increase in commodity prices. As last summer tapered off, however, base metal prices largely leveled out and energy prices began to fall. Almost on cue, the Canadian dollar began to ease back down to 84 cents, a level where it was expected to remain as economic growth tapered off in Canada and the U.S.

                                                                                                                                                                                                                                         [Full Story](http://www.td.com/economics/weekly/may1107.pdf)
                                                                           
                                                 
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