The Great Debate

-Jane Foley is research director at Forex.com. The opinions expressed are her own.-

Earlier this week the S&P 500 was down 15 percent from its April 2010 high.   The ongoing debate on whether the U.S. economy is poised for a double dip recession can be linked with these falls.

At present there is insufficient evidence to conclude that the U.S. economy will fall back into recession, though there are signs that the recovery could be losing momentum.  A key question is whether the adjustment in asset prices seen since the end of April has been appropriate.

Proponents of double-dip imply that asset prices may have further to fall.  In contrast, die hard bulls suggest that equity valuations are looking cheap.  In the past few sessions, the bulls have been gaining the upper hand.

The reining in of government fiscal incentives and in many cases the implementation of austerity measures suggests that economic growth in most of the developed world will be constrained for the next few years.

- Jane Foley is research director at Forex.com and blogs regularly for Reuters Great Debate. The opinions expressed are her own. Reuters will host a “follow-the-sun” live blog on Monday, March 8, 2010, International Women’s Day. Please tune in. -

Projections indicate that by 2050 the world’s population will stand at around 9.2 billion, up from around 6.7 million at present.  The vast majority of this increase will be in the developing world.  In developed world countries populations may start tapering off after 2025.

It seems likely that this explosion in population in the developing world will do nothing to address the fact that that per capita wealth is massively skewed towards the developed world.  Using World Bank data for 2000, the average per capital wealth in the top 10 wealthiest countries is a staggering 170 times greater than the average in the bottom ten.
Demographics in the developed world are defined by low fertility and low mortality rates.  This translates into an ageing population.  Added to this mix is the fact that male mortality rates are higher than female in the developed world.  As a consequence, as these populations age they are becoming predominantly female.  It follows that women are on course to control an increasing proportion of the world’s wealth.
Reports that suggest that women are responsible for buying 80 percent of household goods in the U.S. will not be a surprise to the seasoned shopper.  Over the past decade or so it appears that the advertising industry has been waking up to the notion that women’s responsibilities stretch further than making decisions on washing powder.

-Jane Foley is research director of Forex.com. The opinions expressed are her own.-

Germany’s Finance Ministry this week denied a report in Le Monde that Germany, France and other countries were working on a package to rescue Greece. It seems that for now the official line from the grandfathers of European Monetary Union is that Greece can sort out its own budget deficit. The official line from the Greek government is much the same; it continues to maintain that it doesn’t need a bailout.

The problem with this is that this lacks credibility. The blowing out of the yield spreads on Greek government bonds over bunds and the price of credit default swaps are evidence of that. In the months after EMU, the 5 year Greek-bund spread was less than 200 bps. This week it was over 400 bps. Unless the impact of bond yields can be contained Greece loses a major incentive to stay within EMU.

-Jane Foley is research director at Forex.com. The opinions expressed are her own.-

The final weeks of 2009 have brought a sense that tides may be turning in the foreign exchange market reflecting broader developments in the global economy. The predominant changes relate to the dollar.

December’s 5 percent recovery in the USD index is linked to an improved outlook for the U.S. economy.

- Jane Foley is research director at Forex.com. The opinions expressed are her own.-

A willingness to differentiate between risk on a country or at a regional level is an important part of the repair process in financial markets.

Credit worthiness is at the core of any assessment of risk and naturally credit worthiness can sort "risk" into a hierarchy which should be instrumental to the pricing of assets and currencies.

- 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.

-Jane Foley is research director at Forex.com. The opinions expressed are her own.-

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 first is the view that although the dollar has moved closer to medium-term equilibrium it “still remains on the strong side”.  The second is the (widely held) view that the dollar “is now serving as the funding currency for carry trades” which has contributed to upward pressure on the euro.

-Jane Foley is research director at Forex.com. The opinions expressed are her own.-

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.

A bubble can simply be defined as an occurrence that begins when the price of an asset has been driven significantly above it "fair" value. According to the efficient markets theory this would not happen.

-Jane Foley is research director at Forex.com. The opinions expressed are her own.-

The U.S. dollar may have found support this week but the USD index remains at a 14-month low.

The impact of the financial crisis in drawing buyers to the "safe-haven" dollar has in effect been almost cancelled out by the healing in risk appetite. The dollar looks to have re-embarked on the downtrend that had been in place for more than two years prior to the start of the financial crisis, only now the U.S. fundamentals have arguably deteriorated further.  

-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.

The basis for questioning the USD’s position as global reserve currency stems from its declining value and its "poor" fundamentals.  The dollar index is currently trading close to where it was 14 mpnths ago, ahead of the financial crisis.  At that point the USD had been on a downtrend for over two years. The widening in the U.S.’s budget deficit this year has worsened the fundamental backdrop and drawn attention to its "twin deficits".  This has made creditor nations nervous.