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Tuesday, November 14, 2006

PIMCO's US$ & Economic Outlook

By Yaser Anwar, CSC of Equity Investment Ideas

I came across a really good post at pertaining to the US$ and economic outlook.

According to PIMCO-

"Carry trades will continue to support the dollar if-and only if-investors continue to establish new carry trades. But the Fed's pause in August makes new carry trades increasingly unlikely.

The Fed's decision to pause likely marked the end of its rate hike cycle and the beginning of a path toward rate cuts. With the Bank of Japan and European Central Bank still in tightening mode, short-term interest rates should converge and reduce or eliminate the carry benefits of holding dollar assets.

"A risk to this element of the case for a weaker dollar is the potential for stronger U.S. economic growth that leads the Fed to resume raising rates. However, we view this scenario as unlikely, primarily because of the ongoing slowdown in the U.S. housing market.

Housing and housing-related activity has been a major source of liquidity and credit creation funding U.S. economic growth in recent years. Thus, the slowdown in housing will have a broad and deep impact on U.S. growth and is the primary reason we expect real U.S. GDP growth to fall below trend over the next 12 months.

Slower growth in the U.S., particularly as other economies expand, should also contribute to a reduced foreign demand for dollar-denominated assets."

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