Bond Outlook [by bridport & cie, May 17th 2006]
| The most striking thing about the current decline in the USD is that it is so controlled, primarily by the People’s Bank of China. The world can be very grateful, as all the conditions seem to be present for a rapid collapse in the USD, including the current account deficit, attrition of interest rate differentials, inflationary pressures in the USA, and diversification of currency holdings by more and more central banks and private investors. The USA’s debt-based spending boom is still under way, and we can only watch amazed at the resistance of households and companies alike to the increased cost of borrowing. |
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| The Fed is now presumed to be on “hold”, at least for the June meeting. Our expectation is that more Fed rate rises will be imposed afterwards as Bernanke plays out his balancing game with three painful components: a weaker dollar, some inflation and higher interest rates. He must be watching two developments in particular: will property prices stop rising, thereby blocking households’ route to spending more than they earn, and is the current correction in commodity prices the end of the commodity bubble or merely a breathing space? |
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| Another striking result of the recent fall of the USD has been the even greater decline of many of the high-yielding currencies. |