- USD is in a multi-year downtrend and that the next few years will see a succession of lower highs and lows as it did in the 1990s.
- The choppy USD downtrend of the past couple of years bears a strong similarity with the pattern of the late 1980s and early 1990s. If this pattern holds, the USD will continue to trend lower over the next few years with lower highs and lows. A key factor to be aware of is that the USD downtrend is choppier than was the case from 2002 to 2004.
- In the 1980s, the USD fell sharply from 1985 after the Plaza Accord before stabilising in 1988-89. Thereafter, it gradually trended lower from 1989-1994, despite periodic bouts of upside correction. To date, this seems to be a very similar pattern to what we have seen in the last few years. From 2002-2004, the USD fell sharply, only to stabilise in 2005-06 before going into a choppy downtrend. If history is any guide, the USD should keep trending lower, albeit in a choppy and erratic fashion.
- Economic weakness that has been seen in the US is now rotating to Europe and Asia. This is no longer just a US problem. It is clear however from the latest US FOMC statement that they will continue to be the most aggressive in easing policy, already helping to keep longer term yields low by openly discussing outright purchases of US Treasuries. This, combined with the collapse in inflation expectations, means the yield differential may continue to move more in favour of other currencies vs. the USD. Also the aggressive expansion of the US money supply as part of quantitative easing and the potential for monetisation of the huge fiscal stimulus package in early 2009 is likely to weigh on the USD.
- While some structural USD negatives are set to ease, for example the current account deficit is likely to keep narrowing in the next few years, there is likely to be huge US fiscal deficit keeping USD negative pressure in place.
USD Outlook - keep trending lower
December 22nd, 2008 · No Comments
Tags: Forex Market
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