WHAT FINK MIGHT DO WITH BGI - FTSE

INTEREST RATE OUTLOOK: STEADY AS SHE GOES
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greenback some 25% by midsummer.
Meanwhile, a string of
better-than-expected earnings reports
by US companies helped drop the
dollar to its lowest level against the
euro since early June. By August, the
euro had risen above the $1.40 mark,
its highest position this year.
Speaking on behalf of Dreyfus,
Hoey said that it was not surprising
that the dollar would hit a wall once
the financial crisis began showing
signs of improvement. Contrary to
some opinions, Hoey doesn’t believe
the dollar is overvalued in comparison
to other industrial currencies. Relative
short-term interest rate spreads
shifted against the dollar as countries
such as Japan had less room to reduce
their rates, or, in the case of Europe,
refrained from lowering their policy
rates to the same degree. “However,
the effect of the more aggressive
stimulus in the US is that the
[domestic] economic recovery is likely
to lead the European recovery and
economic activity is likely to remain at
a less depressed level in the US than
in Japan.”
Sterling may also endure periods of
turbulence over the near term. In a
recent report, the International
Monetary Fund (IMF) inferred that
additional injections of capital may be
required in the UK due to the
continuation of challenging economic
conditions, stating: “Substantial
further writedowns would result in an
erosion of capital buffers and might
lead to renewed doubts about the
capital adequacy of individual banks.”
The UK is expected to round out 2009
with a negative growth rate of -4.2%,
improving to near 0.2% next year.
Despite some improvement of late,
the world’s leading economies still find
themselves combating a slew of
negatives, not the least of which is the
continuation of extremely tight credit
conditions. In its recent Global Credit
Market Outlook, State Street Global
Advisors suggested that a global
recovery“ seems to be dependent upon
a genuine improvement in the US, and
this, in turn, depends critically upon
effective economic policy”. On that
point, SSgA expects global growth to
reach -1.1% this year (from 3.2% in
2008), reflecting both a lock-step
contraction of the advanced economies
as well as a slowing of growth within
emerging markets. While growth is
expected to reach positive territory in
the coming year, it will more than likely
track at the recession-level rate of less
than 2.5%. Economic sluggishness will
all but ensure a continuation of slack
monetary policy, says SSgA. “Renormalisation
of policy rates is not
likely to begin anywhere until late 2010
and in most places not until 2011.”
Positive indicator
Though on the one hand the
greenback pullback may be viewed as
a positive indicator—i.e., increased
global investor risk tolerance—some
are worried about its impact on the
US economic recovery. “The central
issue is that crude oil is
predominantly priced in dollars, so a
softer dollar increases energy prices,
such as what Americans pay for
gasoline,” notes Colas. “The average
household buys some 100 gallons a
month, so as gasoline prices rise, their
overall discretionary income falls.
That makes a consumer-led recovery
much more difficult.”
At the same, says Colas, fears of
inflation are unwarranted. “Capacity
utilisation is still so slack, and
unemployment is still rising, that it just
doesn’t seem there is any kind of
inflationary risk for at least the next 12
months,” says Colas.“There have been
worries over this raw flood of money
that has just been issued because to
many people it seems inflationary. The
reality is that people don’t have the
means to go hog-wild on spending,
and from a producer standpoint, why
would you try to raise prices when
you’re just happy to have the capacity?”
Comments made by Fed chairman
Ben Bernanke have underscored the
uneasiness many feel over the ability of
the Fed to take action without any kind
of third-party oversight.“Inadvertently,
quantitative easing has become a
lightning rod in terms of what the role
of the Fed should be during this time,”
says Colas. In a recent market
commentary, Colas suggested that
efforts to “intrude on the Fed’s
independence will likely accelerate”the
longer the US and global economies
remain under pressure. Colas believes
the Fed has done a good job under
difficult conditions, and therefore “any
successful effort to undermine its
independence will only exacerbate
weakness in the dollar and prolong
domestic economic underperformance.
“Hopefully the political rankling
that we’ve seen is nothing more than
theatre, but there are still a lot of
people who legitimately believe that
the Fed has too much power. I do not
believe efforts to change that
independence are constructive at all.”
The great irony, says Colas, is that
the US, the country that started the
implosion, should be considered the
safest haven in the midst of the
implosion.“Fair or not, that is exactly
what has happened, and I don’t
anticipate that changing to any great
degree. We might continue to see
some devaluing of the dollar as money
moves into more speculative
investments, but in general, I think
everyone is looking at the US
economy as the place that has to start
picking up steam in order for the rest
of the world to move forward. If that is
the case, why wouldn’t you want to be
involved in US securities? So for that
reason alone I believe the dollar is safe
for the time being.”
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