Dollar Will Likely Fall Further Before Rising in 2008

Dollar Will Likely Fall Further Before Rising in 2008

We remain comfortable with the view that EUR/USD will end the year significantly lower than it is now, though in the near term the dollar may not rally. We have centred our call on a bounce in the dollar against the EUR and the GBP this year on the thesis that risk-aversion would spike so high as the US falls into a recession that fear-motivated bond flows would perversely support the dollar, just as they did in 2000-01. This thesis has partly worked so far this year, as the sharp erosion in the USD’s yield premium should have been extremely damaging for the dollar but the dollar has not collapsed with the FFR. We still feel comfortable with the ‘Dollar Smile’ framework.
Written by Stephen Roach, Head Economist, Morgan Stanley

Source: http://www.dailyfx.com/story/other/free_third_party_research/Dollar_Will_Likely_Fall_Further_1202143349612.html?engine=rss&keyword=article