US Debt, End of US Recession, Geithner to China
US Debt, End of US Recession, Geithner to China
US debt explosion
GBP traded at its highest level since last November and the AUD and CAD touched new highs for 2009 Wednesday. There are two interesting articles in today’s financial press which help explain why the USD is weakening. The first article appeared in the Financial Times titled “Exploding debt threatens America” written by John Taylor. Taylor writes that US debt will equal 41% of GDP at the end of 2008 and could reach 100% of GDP within the next ten years. He goes on to say that the risk presented by the US debt expansion could do more damage than the current financial crisis. According to the article, it will be difficult for the Fed to exit quantitative ease and reduce its balance sheet and inflation could balloon. Taylor concludes that the Fed may be forced to monetize the debt and the USD could fall sharply in value.
End of US recession?
Reuters carried a report which says that a survey of 45 forecasters at the National Association of Business Economists (NABE) found that three quarters surveyed expect the US recession to end in Q3 2009 and a mild recovery into 2010. The recovery will be more moderate than in the past according to the NABE. The NABE forecasts 1.2% GDP growth into the year end and for growth to return to near trend of 2.7% by Q4 2010. It does not take much to get the US officials excited about possible US economic recovery. The Head of the Council of Economic Advisors Romer says that lower jobless claims and rising consumer confidence encourages the White House that the economy is getting back on track. At some point optimism about the recovery will have to be backed by improvement in fundamentals. Concern about US debt explosion and optimism about the global recovery are the main drivers that have weakened the USD.
Geithner to China
US Treasury Secretary Geithner will travel to China next week to meet with Chinese leaders. His trip is to promote stable and balanced growth between the US and China. Rumors circulated today that China may soon revalue the Yuan. Yuan revaluation rumors supported the JPY and partly offset the impact of escalating tensions with North Korea. US officials are concerned that the Yuan is undervalued and in the past have criticized China for allegedly manipulating its currency to increase export competitiveness. China has expressed concern about rising US debt, its holdings of US assets and has called for a study of replacing the USD as the global reserve currency. The trade will be monitoring Geithner’s trip to see if any of these issues are revisited. If China restates concern about US debt or holdings of US assets the USD could experience additional selling pressure.
By Michael J. Malpede
Easy Forex
Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst.
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