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Morgan Stanley Dean Witter currency strategist, Stephen L. Jen, also expresses the hope for a "soft landing" scenario in a recent piece entitled, "The Texture of a USD Correction":
"Our central case is that the dollar will have a soft, benign correction over the coming year or so without a crash, and its effect on the rest of the world will not be negative. A soft, benign landing in the dollar would have the following effects: First, a gentle rally in euro/dollar would help suppress inflation in Europe, which in turn would enhance the purchasing power of consumers and would therefore support economic recovery in Europe and in the rest of the world. Second, a gradual appreciation of the euro in the remainder of the year should bolster European citizens’ confidence in the currency in the run-up to the launch of the new notes and coins. Third, while currency policies are mostly about reallocation of growth between countries and do not themselves directly contribute to increasing the overall size of income in the world, a gentle rally in the euro could still have an indirect positive effect on global growth. Because of Europe’s lack of exposure to the IT sector, monetary stimulus could be more effective in Europe than in the US and Japan. A rally in the euro could push the ECB closer to cutting interest rates. And with the most ‘effective’ central bank then cutting, there could be a marginal net boost to global demand."
We have our doubts. In this era of derivatives-led, turbo-charged finance, it is hard to envisage an environment in which US policy makers could facilitate a controlled decline of the dollar, given the speed, mobility, and leverage behind today’s volatile capital flows. The foregoing Morgan Stanley analysis presupposes a world full of methodical, enlightened investors, who calmly reallocate their capital from time to time, an environment in which fundamentals always win out over irrational panics, and trend-following destabilising speculation is non-existent. Needless to say, this is not a true picture of the world in which we live today. |
