2009年9月15日 星期二

Likely Trend of US Dollar

The points are well established that there is really a risk of inflation due to the policy of quantitive easing by all western countries.

However, the scenario of inflation is based on the assumption the world is starting to recover and the excess liquidity in market will drive up the assets prices. This has not happened yet and may or may not happen in the near future. From recent data, the borrowings of private sector in Europe and US have not yet picked up to a comfortable level. There was recentlly published figures indicating that the inflation rate of Europe was almost dipping below zero.

In fact, the Fed and ECU have admitted that the present economic situation has not returned to healthy condition. The risk of downside is still in exist.

Against this backdrop, we should not be worry much about inflation which may be running at very low rate in the years ahead following what Japan had been doing in 1990s.
The quantitive easing of money supply will give rise to fearsome inflation is well recognised and supported by a large group of traders and economists.

However, there is another school of thought that the world is now having excess capacity in respect of production and labours. As a result, the unemployment rate will not go down for a few yeasrs until excess capacity is gone and corporations start to expand staff for increasing production. With the house bubbles bursts happened in US, UK and parts of Europe, the individual households will need to repay the debts of mortgage contracts in the years ahead. 
Against this backdrop, the private consumption will be continuously constrained at low level while the consumers are repaying the debts. The wages will not have momentum to go up as the labour markets are still having abundant supply. The combined effect is to restrain the inflation. The other factors affecting inflation are currencies values and commodities prices.

For US dollar, people have been saying that it should be declined to reflect the strength of US economy. However, UK and Europe are suffering the same problem. All these major currencies - dollar, sterling and euro are facing the same downside risks. If they are at the same situation, then there is no way that trade ranges among these currencies will be widened. Simply speaking, it is very likely that the values of these currencies will be stable for quite a while.

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