Dollar Outlook Deteriorates

The medium-term dollar outlook is continuing to deteriorate as the Fed and Treasury continue to promote huge debt issuance and balance sheet expansion

The Euro weakened back towards the 1.28 level in early US trading on Tuesday, but then secured renewed gains with a move to above 1.30 for the first time in three weeks as there was a reduction in underlying dollar demand.

The Federal Reserve announced a further US$800bn support package for financial markets and the economy. In particular, the authorities want to narrow mortgage credit spreads which would lower interest rates and help underpin the housing sector. In this context, the Fed will buy US$600bn in mortgage-backed securities and spend a further US$200bn on supporting credit facilities in consumer-related sectors. The action will maintain some degree of optimism over measures to support the economy and equity markets remained firm. There will, however, be serious longer-term fears over the budget and a huge expansion of the Fed’s balance sheet will pose major risks to economic and currency stability.

Third-quarter US GDP was revised to show an annualised contraction of 0.5% from the previous -0.3% estimate as household spending fell sharply. The Case-Shiller house-price index also recorded a 17.4% decline in the year to September. The latest consumer confidence data was stronger than expected with a recovery to 44 in November from a revised 38.8 the previous month as energy prices fell sharply, although this is still at a historically depressed level.

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