[Dan]

Global FX markets remain dominated by the ‘green shots’ emerging in the world economy. From July 2008 to March 2009, the US dollar (USD) benefitted from global deleveraging, investor repatriation, and a focus on bad news outside the US. Given the global recession and ongoing global deleveraging, there may be renewed rallies in the USD. However, as global economic expectations bottom out, FX markets should re-focus on poor US fundamentals, which include weak growth prospects, zero interest rates, and a widening fiscal deficit. This will resemble the period from 2000-02, where the USD was strong during the recession in 2001 but started to fall when the global economy bottomed out at the end of 2001.

As such, EUR will gradually gain ground versus the USD. The ECB may cut the refi rate to 0.50% by Q3 and expands its credit easing policies. However, the Fed will be far more aggressive in its quantitative easing policies than the ECB, and that this will dominate EUR-USD dynamics further out. As global economic expectations stabilise and deleveraging runs its course, the increasing supply of the greenback will lead to a gradual and sustained period of USD weakness.