Wednesday April 21, 2004 - 18:09:47 GMT
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GVI MONTH AHEAD DOLLAR OUTLOOK
The outlook for the dollar seems always to boil down to a weighing of structural factors against cyclical patterns. The structural issues will never go away. The budget and Current Account deficits are fixtures. The global economy depends on U.S. consumption to drive growth in trade and government spending in the U.S. helps stimulate domestic growth. Given that these are structural issues, they tend to be a constant for the forex markets. Thus I tend to look elsewhere for an explanation when analysts trot out the twin deficit argument when the dollar is in a weak spell.
As for the cyclical factors, they can be a strong source of dollar demand from time to time. The forex markets perceive that the U.S. is moving into a period of strong cyclical expansion now and this is driving anticipatory dollar demand. Itís not the level of U.S. interest rates but the direction in which they are moving that encourages dollar buying or selling.
Thus since the markets are demanding confirmation that the recovery will be sustained, the U.S. employment picture is critical. However, price performance has become a growing issue at the Fed with Greenspan saying that deflation is no longer a concern. The last key to the puzzle would be a sustained improvement in employment, and we feel that such an improvement is likely over the months ahead.
I expect the Fed to hike rates by 25bpís on August 10. The one cloud remains the Iraq conflict and terrorism. Either could flare up again at any time. I am expecting a positive dollar performance in the month ahead.
Individual currency forecasts are on GVI.
-- GVI John
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