Dollar to seesaw as slump looms

John R Taylor at Hedge Funds World Middle East 2010 in Dubai. (DENNIS B MALLARI)

The US dollar would strengthen first and then dip as the US and possibly the world approaches a second-dip depression by the middle of this year, the chairman and CEO of one of the world's oldest and most established currency management company, said here yesterday.

A confounding mix of factors ranging from the ambitious Troubled Assets Relief Programme (Tarp) of the United States waning down to an end, or at least impeding this year, to the economies in Europe, particularly Greece, continuing to have high levels fiscal deficits will trigger a double-dip recession said John R Taylor, Chairman and CEO of FX Concepts, a New York-based currency management firm.

"Growth in the US so far has been driven by government stimulation. That would stop sometime mid this year. And that make the ongoing global economic recession a double-dip one as low levels of underlying market demand would get exposed," Taylor said on the sidelines of a hedge fund conference in Dubai.

A second wave of recession will initially boost the greenback considering a dearth of liquidity in the US will ensure a flight of capital from the world to the US, Taylor said.

"The US currency will later fall as the feeling of liquidity escaping the markets gradually seeps in," said Taylor. The US currency has strengthened on the announcements of good economic data every month. Taylor said this stream of good data is not expected to continue throughout this year.

Taylor discounted the set of good economic data emerging over the past three months as "inventory driven" and not sustainable, an outlook that Marios Maratheftis, the Head of Regional Research at Standard Chartered Bank (UAE), holds. "The possibility of a double-dip recession depends on whether the right policy will be implemented to counter it. If the US Government resorts to a quantitative easing and channels money into assets then better news could emerge from the US," Maratheftis said.

The price of oil may also fall this year due to a possible onset of a second wave of recession and therefore a lack of demand. On the other hand, investors may flock to gold, thus raising its prices, Taylor said. "I would not say that oil would fall back to a price of $ 40 a barrel, but its price will certainly come down this year. All in all, oil and gold will continue to hold their relationship with the dollar."

Gold and oil have traditionally had an inverse relationship with the greenback.

Meanwhile, currency markets are apparently sending confusing signals with the euro also expected to devalue this year on the back of the Greece crisis and the high levels of fiscal deficit in Spain and Portugal, Taylor said.

"The dollar's performance this year will more be a function of what happens in the US. The US Government wants the dollar to drop," he said, terming the recent speculations of IMF wanting to sell about 192 tonnes of gold a US Government supported step to devalue gold (and therefore strengthen the dollar) as "false". About 1.36 dollars equalled a euro yesterday without falling or rising from the previous days.

Meanwhile, Taylor said he does not see the situation improving in Greece this year. "I see a high probability of a default of Greece debts."

 

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