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Global FX
Different forces are driving the greenback to multi-month lows against other majors in the past two weeks. These include renewed optimism about the banking and economic outlook which eroded the greenback's safe haven appeal, as well as concerns about the US's weakening credit worthiness.
A slew of better than expected economic reports out of the industrialized economies raised hope that global recession was easing. The outlook for the banking sector also improved due to reports that some US banks were planning to repay emergency funds they received from the government. Such news led to a rise in risk appetite, resulting in a reducing demand for safe havens such as government securities and the greenback.
Dollar sentiment was further undermined by fresh concerns about the US's rating outlook. Rating agency S&P lowered the outlook on UK's credit rating to "negative" from "stable" on May 21 due to concern about the country's increasing debt burden. With the Obama administration also facing a growing fiscal deficit and debt burden due to its effort to revive US economic growth, some have started to price in the risk that the US might one day lose its top credit rating too. Such concerns led to a sharp dollar sell off, causing it to fall to multi-month lows against all majors. The British pound approached the 1.60 level and the euro surged above 1.40 on May 22.
The dollar might be able to find support after its recent sharp off, but its longer term outlook remains negative. Apart from concerns about its creditworthiness, the massive injection of liquidity by the Fed in its attempt to unlock credit markets and revive growth would lead to large supply of dollars and erode its value.
Global Market Intelligence (May 25, 2009). Hang Seng Bank Limited. All rights reserved. Reproduction of article(s) in whole or in part is permitted provided the source is quoted. Please direct any inquiry to Treasury, Planning and Research Department, G.P.O. Box 2985, Hong Kong.
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