Tuesday, June 15, 2004

If this is not evidence of how crazed the global economy is now, I don't know what is. The US sets five monthly trade deficit records in a row. The current account deficit as a percentage of GDP never even approached 'correction' during the 2001-03 recession and now seems surely to pass the 5% mark again for 2004:I (look to Friday's numbers). And yet we hear from Morgan Stanley that the US dollar is undervalued!
Our global currency team has revisited its G7 currency forecasts. The team now believes that the multi-year structural correction in the USD is over and that the risk of a significant undershoot in the US dollar index is minimal. One of the primary justifications for this call is valuation. The team's latest calculations indicate that the USD index (against the majors) is no longer overvalued; it is actually undervalued, for the first time since 2000Q1. The global team has revised its forecasts for the euro/US$ to 1.13 and for the US$/JPY to 115 by end 2005 compared with our earlier forecasts of 1.20 and 93.
The dollar's 26% slide against major currencies from February 2002 to January 2004 (only 14% per the broad dollar index, however) has already been reversed by one-fourth during the first half of this year and per Morgan Stanley is going nowhere but up.

Current account deficits become 'adjusted' via falling currencies and/or global economic growth. Since there seems now no chance of #1 happening and what we have of #2 is mostly export-led to the United States (on top of the fact that no amount of global growth is going to let the US export its way out of this corner), the US could begin seeing Australia- and New Zealand-like current account deficits (>6% of GDP) by next year. And after that we'll really be into uncharted territory.


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