Experts Talk G-20, Dollar, Gold, Fed

By BW Staff Here, BusinessWeek compiles comments from Wall Street economists and strategists on key economic and market topics on Nov. 9: Nick Bennenbroek, Wells Fargo Bank (WFC) The U.S. dollar is broadly softer [on Nov. 9]. Two factors explain most of today's decline. First and perhaps most important, the G-20 finance ministers and central bankers said [at their weekend meeting] it was too early to exit from the current economic stimulus policies, a theme that is supporting risk appetites. Furthermore, the finance ministers and central bankers made no significant comments on currencies, which is also encouraging market participants to take the dollar lower. Also garnering some attention, the IMF said in an update that the dollar is serving as the funding currency for "carry trades" and that it is still on the "strong side." Second, Friday's U.S. jobs report has not been interpreted as especially negative by financial markets. It is true that payrolls fell by 190,000 and the jobless rate rose to double-digits at 10.2%. However, revisions to prior months and a rise in temporary employment were hopeful. Overall, financial markets have begun the week on an optimistic footing, which could mean a bias for a softer dollar over the coming week. Marc Chandler, Brown Brothers Harriman Japan's foreign reserves stood above $1 trillion in October for the 12th consecutive month. Reserves rose a little more than $4 billion over the course of the month. This largely reflected valuation adjustments. The euro rose roughly a cent against the dollar, and this is partially offset by the decline in asset (bonds) prices. Also in terms of valuation, the price of gold appreciated from $995.75 to $1100. This increase was worth about $1 billion to Japan's reserves. These was also a modest increase in Japan's SDR [special drawing rights, a type of foreign reserve asset] holdings. In some ways, these forces behind the rise of Japanese reserves will play out in other countries as well. The dollar's decline boosts the value of non-dollar assets held in reserves. The rise in the price of gold may be important as well. It is not so much that many countries especially in Asia and the Middle East and developing countries in general have large gold holdings, but the magnitude of the move is significant. Edward Yardeni, Yardeni Research A surprising number of level-headed folks who I have known over the years are confessing to me that they've become gold bugs. They own the [SPDR Gold Shares ETF] (GLD) in their personal portfolios. At the end of September, GLD had a net asset value of $35 billion. Net inflows into this ETF totaled $14 billion through the first nine months of this year. More and more level-headed folks are concerned that the folks in Washington have lost their minds. Congress and the Administration are mindlessly widening the federal deficit, while the folks at the Fed have enabled them by purchasing lots of U.S. Treasury and Agency bonds. The question is when and how will the Fed implement an exit strategy from this so-called quantitative easing? According to the latest available minutes of the FOMC meeting on Sept. 22-23, Fed officials didn't spend much time discussing an exit strategy. Indeed, some participants suggested that additional [quantitative easing] purchases should be considered to revive economic growth more rapidly. Only one member suggested scaling back these purchases. Apparently all of them agreed that the QE program should be expanded if economic conditions deteriorate again. Jan Hatzius, Goldman Sachs (GS) [The Nov. 4] FOMC statement spelled out the conditions for the Fed's "extended period" of near-0% rates, namely low actual and expected inflation and a continued large output gap. The statement was consistent with our expectation of no Fed rate hikes for a very long time to come, at least through the end of 2010. One point that does not get enough attention in the debate is that both fiscal and monetary policy are already on track to "exit" from the current stance, via 1) a gradual turn from sharp fiscal expansion to modest fiscal restraint starting in the second half of 2010, and 2) the end of the Fed's asset purchases in the first quarter of 2010. Both of these factors are likely to restrain growth, at least to some degree. With a huge output gap and inflation already well below the Fed's implicit 2% target, it does not make much sense to exert additional restraint via higher short-term interest rates.

To continue reading this article you must be a Bloomberg Professional Service Subscriber.