Dollar fall will continue

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Dollar fall will continue

Long-term themes, such as the US current account deficit and output gap, have caught the forex market's attention and will be crucial to the dollar exchange rate. Lara Rhame reports

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GLOBAL CAPITAL REALLOCATION will be a central theme in the foreign exchange markets for many quarters to come, at times eclipsing the fundamentals driving relative economic growth. That means a lower dollar, and big changes for some other currencies.

For some time, fundamental analysts have been writing about long-term themes such as capital flows and current account imbalances that would eventually move the big three currencies a great deal when markets finally noticed them. They have now.

Growth forecasts remain central to forex forecasts and capital allocation but the focus has shifted towards how fast countries are growing relative to their potential. And over the next year, this will be acutely relevant for the US.

For the US economy, after several false starts, it is finally safe to say that recovery is here for real. Growth in the third quarter was extraordinary, and probably unsustainable, as tax cuts and rebate payments drove consumers to a frenzied pace. But across the board, demand and output indicators are off their lows, and business spending is showing signs of taking over as a key support for the economy.

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