[Dan]

Near-term (rest of Q4-2009)
USD is expected to remain under pressure in the near term as super-low G10 yields, improving global macro data, and accommodative global monetary and fiscal policies motivate further yield-seeking, with the USD likely to be used as a funding currency. In addition large amounts of investor cash held in US money market funds – remain on the sidelines, but continue to be drawn down to invest in higher-risk instruments. However, given the recent emergence of profit-seeking interest and emergent signs of short USD fatigue, the near-term USD weakness is expected to unfold in a choppy manner.

Medium-term (H1-2010)
The USD is likely to consolidate higher as ongoing stresses in cross-currency basis swap markets, easing global money supply growth, and a likely stalling of global growth surprise momentum due to fading policy stimulus prompt a reassessment of asset market valuations and a short USD positioning squeeze. Ultimately, the USD’s downward trend will resume, and most EM currencies should resume their strengthening trend. This is expected to begin in H2-2010 as market consolidation passes and use of the low-yielding USD as a carry-trade financing vehicle resumes.