[B]Weekly Bank Research Center 7-23-07[/B]
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[B] The Biggest Dollar Diversifiers Are American
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[/B] [/B] [I][I] Stephen Roach, Head Economist, Morgan Stanley [/I] [/I]
The dollar is very weak relative to most currencies. While cyclical factors have played an important role, I don?t believe that cable is trading at 2.05 and EUR/USD at 1.38 due only to these rather innocuous cyclical factors. Other structural factors may be at play. One possible structural reason for the dollar to have had a gradual downward trajectory since 2002 is, I suspect, portfolio diversification by US real money managers. There are ample cyclical reasons for the dollar to have underperformed recently. First, the US economy is weaker than almost every other economy in the world. Though we may have seen the trough in the US business cycle in 1Q, the recovery trajectory is likely to be modest, after a surge in 2Q. The rest of the world, however, continues to surprise to the upside, showing no sign of lagged effects of the softness in the US economy from 2Q06 to 1Q07. No longer do investors doubt the de-coupling? thesis. Monetary policy between the Fed and other central banks is in direct correspondence to this expected divergence in economic growth. As a result, the dollar may sag as long as other central banks remain in motion.
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[B] US Dollar Shorts at All Time High
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[/B] [/B] [I] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
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The sub-prime worries continue to weigh on dollar sentiment, with net short USD positions reaching a new all-time high. Elsewhere, net currency positions are only marginally changed from last week: net long GBP positions climb again to a new all-time high while net long EUR positions are cut back slightly. Investors remain upbeat on commodities: While net long oil positions are cut back, they remain close to last week?s all-time high, while investors add positions in gold, silver and copper. Net carry positioning climbs marginally following last week?s drop and remains at historically high levels. Net long AUD and NZD positions are extended while investors also add to net short JPY positions. Net long 10-year treasury positions climb markedly but still remain well below levels seen earlier in 2007.
[Full Story](http://danskeresearch.danskebank.com/link/IMM230707/$file/IMM_230707.pdf)
[B] [B][B][B] [B] US: The Fed Reduces Its Expectations
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[/B] [/B] [I][I]John E. Silvia, Ph.D. Chief Economist, Wachovia[/I] [/I]
Ben Bernanke?s testimony to the House and Senate was the highlight of this week?s busy economic schedule. The Fed Chairman noted that the Fed?s expectations for economic growth had been lowered slightly for 2007 and 2008, largely reflecting the continued decline in residential construction. Real GDP is expected to rise between 2.25 and 2.5 percent this year and 2.5 and 2.75 percent in 2008. Expectations for inflation remain unchanged, with the core PCE deflator expected to rise between 2.0 and 2.25 percent in 2007 and 1.75 and 2.0 percent in 2008. The unemployment rate is expected to rise slightly, ending 2008 at 4.75 percent.
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[B] [B][B][B] [B] US Q2 GDP and Housing Market Data the Key Releases this Week
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[/B] [/B] [I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
Annualised US real gdp growth is forecast to have rebounded strongly in Q2, to 3.5%, compared to just 0.7% in Q1. We expect a solid positive contribution from external trade, stronger business investment and a re-stocking of inventories in Q2. However, continuing concerns about the health of the housing market and higher gasoline prices may have slowed consumer spending growth from its robust 4.2% pace in Q1, and residential investment is likely to have again detracted sharply from overall gdp growth. We agree with the comments from Fed chairman Bernanke last week in his testimony to the House Financial Services Committee that the housing market is set to remain weak and a drag on the economy for longer, rather than collapse. Data this week should show sales of existing and new homes remained weak in June, leading to a growing over-hang of unsold homes, which is likely to continue to weigh on construction activity and house prices. However, we believe a healthy labour market and lower house prices should eventually support stronger home sales in the year ahead.
[B] [B][B][B] [B] Inflation Cooling in the U.S., Still Elevated in Canada
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[/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
Let the conspiracy theories begin. The Bank of Canada increased their targeted interest rate by a quarter of a point this week to 4.50%. While the change was largely telegraphed well ahead of time, it does come at a time when not every sector of the Canadian economy is firing on all cylinders. In particular, Canadian manufacturing has not had a stellar performance over the last year, as weaker U.S. demand and the elevated loonie have continued to increase the obstacles for the sector to overcome. But the Bank of Canada - in fact any central bank - must look at the economy as a whole. Monetary policy is not an effective tool for targeting specific sectors. And as a whole, the Canadian economy has been stronger than expected. Moreover, policymakers are not ignoring the woes of Canadian manufacturers or the health of the economy, nor are higher interest rates part of any dastardly plan. Quite the contrary, history shows that high and persistent inflation is the biggest threat to the Canadian economy and Canadian competitiveness abroad.
[B] [B][B][B] [B] Other Pre-screened Independent Contributors[/B]
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[/B] [/B] [I] J-Chart [/I]
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