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FX Crossroads

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New FX forecasts − USD set to strengthen further

Wed, Oct 15 2008, 15:10 GMT
by Danske Research Team

Danske Bank A/S


Summary and conclusions

• We have updated our FX forecasts. We anticipate the financial crisis will continue to dominate the agenda in the short term and have kept the global recession theme as the major driver in the longer term. We believe in a broad-based dollar strengthening 12-months ahead.

• IMF's COFER statistics covering Q2 08 confirmed two of the main trends seen in recent years: i) World reserves are growing fast, although growth decelerated in Q2, and furthermore; ii) There has been no marked change in the dollar share of total reserves, although there are tentative signs of a reduction in the share held in dollars in favour of the euro in particular.

• For the past three quarters, net capital flows into the US have been positive. If this trend can be sustained it will provide important support to the US dollar. The other side of the Atlantic, the eurozone has seen a substantial net capital outflow in recent months. If the US can manage to stabilise its financial markets in the coming months, capital flows should continue to point to lower EUR/USD levels.

• The global credit crisis is now spreading to the most leveraged economies in the world and it now looks like there will be renewed focus on the IMF's role in international crisis management. We identify the most likely candidates for an IMF visit.

• FX Crossroads is published every second Wednesday. Next publication date is October 29.


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