The US has many characteristics that demand a lower USD. Its recession has been about as bad if not worse than most other countries thereby reducing any growth impetus to the USD. At the same time, the deterioration in the budget
balance has been one of the most severe in the world which in itself it an important negative influence on the USD.
Linked to that is the fact that the US is so very heavily dependent on foreign savings to fund its budget that the bigger deficit has meant the USD has had to weaken to attract fresh inflows. This is in stark contrast to Japan, for example, where similarly horrendous public finances has had little JPY impact because the vast bulk of the budget deficit is financed from domestic sources. With domestic
savings in the US still very low, even allowing for the rise in private sector savings with the recession, it seems that the US will still require the rest of the world to fund around half of its new bond issuance over the next few years.
At the same time, the current account deficit remains chunky, at around 3% of GDP. While this is nicely lower than the peak levels for the deficit around 6% of GDP just a year or two ago, it is high when compared with many other regions.
All of the above, plus the super stimulatory stance of policy from the Fed, show clearly USD weakness is fully justified. When the US economy does eventually start to exhibit some sustained positive trends into 2010 and 2011 – perhaps GDP growth locking in a 2.5%+ momentum, if there is a surprise narrowing in the trade and current account deficits and if the budget deficit and bond issuance task narrows as the economy recovers, the USD could well start to move higher. It should.
In the near term and until there is a broader type of global economic pick up and a return to some form of normalcy in markets, policy and economy performance, it is still seems wise to trade the USD according to market risk assessments. This fashion will not last forever and once foreign exchange markets focus more on fundamentals, the is scope for the USD to find favour.
|