The Great Debate UK
- Jane Foley is research director at Forex.com. The opinions expressed are her own. -
At the height of the financial crisis few argued against the need for a huge fiscal and monetary policy response. As a result the global economy has moved away from the precipice. For many governments 2010 will bring a different kind of precipice, this will be the year in which many electorates will be made to start paying for their governments’ huge fiscal binges.
Certain countries will enter this process severely disadvantaged. Earlier this year UK debt was singled out by S&P for a possible downgrade. This week Moody’s commented that UK debt along with that of the US will test the boundaries of its top AAA rating.
The UK stands with the U.S., Ireland and Greece as being one of the few economies likely to register a double digit budget deficit/GDP ratio this year. Fitch’s downgrade of Greece this week has propelled it into the spotlight. This news followed the decision from S&P to put its sovereign rating on negative watch.
Spot gold prices are up over 40 percent year on year. Yet, according to the World Gold Council, demand for gold in the third quarter of 2009, dropped by 34 percent year on year. Of course, demand in the third quarter of 2008 was exceptionally high due to the financial crisis. As well, relative to the third quarter average of the five years to 2007, demand for gold in Q3 2009 was down 4 percent.
When confronted with the ferocity of the rally in gold, the fact that the third quarter demand for gold was below the seasonal average is surprising. The dynamic between price and demand suggests some fall in supply perhaps led by increased hoarding.
A month or so ago, there was a lot of talk that risk appetite would be pared back over the coming months. This talk was built around relatively cautious expectations for economic growth in most of the G-10 next year.
November meetings of leaders from the Group of 20 industrialized nations may not have had exchange rates on the agenda, but the notes prepared by the International Monetary Fund included some meaty foreign exchange references.
The discrediting of the efficient markets theory in the aftermath of the financial crisis appears to have been accompanied with growing support for the view that rather than efficient in nature, financial markets are predisposed towards the formation of bubbles.
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
If there is one foreign exchange story that will run and run it is the one about the U.S. dollar (USD) and its future as the world’s dominant reserve currency. The discussions on this topic have at least brought some agreement, namely that there is no clear alternative and therefore there can be no quick fix change. That said, much uncertainty remains as to what can, if anything, eventually replace the dollar.