Thread: FBS: US dollar needs global crisis to strengthen

Analysts at Scotiabank note that although the market’s risk aversion’s increasing and they turn to safer currencies such as yen and franc, the stage where investors are seeking the real safe havens hasn’t been reached yet. Without a serious crisis and with monetary policy in investors' sights they won’t turn to US currency.

The strategists are bearish on the greenback. In their view, during the next few months US dollar will trade sideways, but by the end of the year it will go down.

Strategists at BNY Mellon share the same views. The specialists note that though dollar's probably slightly oversold now, the geopolitical events in North Africa and the Middle East remain relatively contained. Though investors avoid assets in the Middle East and South Africa, they keep favoring higher-yielding overseas assets in Asia and Latin America. The bank reminds that investors’ demand for US dollar surged in 2008 after Lehman Brothers collapse, so in order to strengthen American currency needs a “good old-fashioned global crisis”.

The VIX, a widely used measure of investor expectations of volatility, now stands at 21-23. That's up from 16 or 17 before the Middle East turmoil began, but still below the 45-50 level reached last summer, when investors were worried about a European sovereign debt crisis.

Analysts at Morgan Stanley claim that Japanese yen may fall as the Bank of Japan may loosen its monetary policy even more making investors more concerned about the country’s fiscal state. If it happens, yen will again be used as a funding currency for carry trades and investors will sell it for higher yielding assets, for example, the ones in Australia and New Zealand.

According to Morgan Stanley, yen will fall to 93 per dollar and to 115 per euro by the end of 2011.

The BOJ has pledged to hold its benchmark interest rate at 0-0.1% until it can expect stable price gains, which board members see at about 1%. Japanese consumer prices excluding fresh food fell for a 23rd straight month in January, falling 0.2% from 2010 level.

On February 22 Moody’s Investors Service reduced Japan’s debt rating outlook noting that political gridlock will constrain the country’s efforts to tackle debt that is poised to exceed twice the size of GDP.

On March 1 Japan’s lower house of parliament approved Prime Minister Naoto Kan’s record 92.4 trillion yen ($1.1 trillion) budget. Never the less, Kan didn’t manage to persuade opposition lawmakers to authorize 44.3 trillion yen in government bonds to help fund the budget.