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The Outlook for the Dollar in 2008 Jay H. Bryson, Global Economist October 9, 2007 US Trade Weighted Dollar Major Index March 1973 = 100 115 115 Major Currency Index: Oct @74.3 Growth Sustained Remains Below Trend The Dollar’s Slide PCE Continues to Has Renewed in Maintain Strength Earnest This Year. Residential Weakness Yet to Infect Economy 110 110 105 105 100 100 95 95 90 90 85 85 80 80 75 75 70 70 2000 2001 2002 2003 2004 2005 2006 2007 Source: Federal Reserve Board Wachovia Economics Group 2 Current Account Deficit Quarterly in Billions of Dollars, Seasonally Adjusted $0 Growth Sustained Remains Below Trend The Current Account PCE Continues to Deficit Likely Will Maintain Strength Remain “Large” For Some Time. Residential Weakness Yet to Infect Economy $0 -$20 -$20 -$40 -$40 -$60 -$60 -$80 -$80 -$100 -$100 -$120 -$120 -$140 -$140 -$160 -$160 -$180 -$180 -$200 -$200 -$220 -$220 Balance on Current Account: Q2 @$-190.8 B -$240 -$240 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Source: U.S. Department of Commerce and Wachovia Corp. Wachovia Economics Group 3 Purchases of U.S. Assets by the Foreign Private Sector Billions USD $350 $300 Growth Sustained Remains Below Trend Foreign Purchases PCE Continues to of U.S. Assets Are MaintaintoStrength Starting Trend A Bit Lower. Residential Weakness Yet to Infect Economy $350 FDI: Q2 @$73.6B Portfolio Investment: Q2 @$227.5B $300 $250 $250 $200 $200 $150 $150 $100 $100 $50 $50 $0 $0 -$50 -$50 2002 2003 2004 2005 2006 2007 Source: Department of Commerce and Wachovia Corp. Wachovia Economics Group 4 Foreign Purchases of U.S. Securities 12-Month Moving Sum, Billions of USD $1200 $1,200 Private: Jul @$994 Billion Official: Jul @$216 Billion Growth Sustained Remains Below Trend Purchases of U.S. Assets by the PCE Continues Foreign Privateto Maintain Strength Sector Significantly Exceed Official Purchases. Residential Weakness Yet to Infect Economy $1000 $1,000 $800 $800 $600 $600 $400 $400 $200 $200 $0 $0 -$200 -$200 98 99 00 01 02 03 04 05 06 07 Source: Department of the Treasury and Wachovia Corp. Wachovia Economics Group 5 Foreign Purchases of U.S. Securities by Type 12-Month Moving Sum, Billions of USD $600 $600 Treasury: Jul @$155 Billion Corporate: Jul @$474 Billion Equity: Jul @$210 Billion Agency: Jul @$154 Billion $500 Growth Sustained Remains Below Trend Purchases of Fixed Income Securities PCE Continues to Are Significantly Maintain LargerStrength Than Purchases of Stocks. Residential Weakness Yet to Infect Economy $500 $400 $400 $300 $300 $200 $200 $100 $100 $0 $0 -$100 -$100 98 99 00 01 02 03 04 05 06 07 Source: Department of the Treasury and Wachovia Corp. Wachovia Economics Group 6 U.S. Purchases of Foreign Assets Billions USD $150 $150 FDI: Q2 @$71.5B Porfolio Investment: Q2 @$88.1B Growth Sustained Remains Below Trend U.S. of PCE Purchases Continues to Foreign Assets Are Maintain Strength Trending Higher. Residential Weakness Yet to Infect Economy $100 $100 $50 $50 $0 $0 -$50 -$50 2004 2005 2006 2007 Source: Department of Commerce and Wachovia Corp. Wachovia Economics Group 7 Real Exports & Imports of Goods 20% Growth Sustained Remains Below Trend The Current Account PCE Continues to Deficit Should Get Maintain SmallerStrength Going Forward. Year-over-Year Percent Change of 3 Month Moving Average 20% 10% 10% 0% 0% -10% Residential Weakness Yet to Infect Economy -10% Exports: Jul @9.1% Imports: Jul @2.2% -20% 1998 -20% 2000 2002 2004 2006 Source: U.S. Department of Commerce and Wachovia Corporation Wachovia Economics Group 8 Central Bank Policy Rates 8.0% 8.0% US Federal Reserve: Oct @4.75% Bank of England: Oct @5.75% ECB: Oct @4.00% Reserve Bank of Australia: Oct @6.50% 7.0% Growth Sustained Remains Below Trend Interest Rate PCE Continues to Differentials Have Maintain Strength Moved Against the Dollar. Residential Weakness Yet to Infect Economy 7.0% 6.0% 6.0% 5.0% 5.0% 4.0% 4.0% 3.0% 3.0% 2.0% 2.0% 1.0% 1.0% 0.0% 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 Source: Bloomberg LLP and Wachovia Corp. Wachovia Economics Group 9 U.S. Corporate Bond Spreads (basis points, over U.S. Treasury yields) 400 Growth Sustained Remains Below Trend Dislocations in PCE Continues Credit Marketsto Maintain Strength Could Cause Growth to Slow. Residential Weakness Yet to Infect Economy 400 350 350 300 300 250 250 200 200 150 150 100 100 1996 1998 2000 2002 2004 2006 Source: Global Insight and Wachovia Corporation Wachovia Economics Group 10 Foreign Purchases of U.S. Securities by Type USD Billions $1,250 Growth Sustained Remains Below Trend Reduced Issuance of Structured Fixed PCE Continues to Income Products Maintain Strength Will Give Foreigners Less U.S. Securities to Buy. Residential Weakness Yet to Infect Economy $1,000 $1,250 Corporate ABS Agency ABS Corporate Agency Treasury Equity $1,000 $750 $750 $500 $500 $250 $250 $0 $0 July 2004 - June 2005 July 2005 - June 2006 Source: Department of the Treasury and Wachovia Corporation Wachovia Economics Group 11 Emerging Markets Stocks & US Stocks (index, Jan 2003 = 100) Growth Sustained Remains Below Trend Stock Market Returns Abroad, PCE Continues Especially in to Maintain Strength Emerging Markets, Have Been Superior, Than in the U.S. Residential Weakness Yet to Infect Economy 350 350 300 300 250 250 200 200 150 150 100 100 50 MSCI Emerging Markets (Local) S&P 500 50 0 Jan 2003 0 Jan 2004 Jan 2005 Jan 2006 Jan 2007 Source: Bloomberg LLP, Morgan Stanley Capital International, and Wachovia Corp. Wachovia Economics Group 12 Wachovia International Economic Forecast (Year-over-Year Percentage Change) 2007 Global Growth Should Remain Solid. Global Major Economies United States Eurozone Germany France Italy UK Japan Canada Developing Economies China India Mexico Brazil 1 GDP 2008 2009 2007 CPI 2008 2009 N/ A N/ A N/ A 4.4% 4.0% 4.2% 2.0% 2.5% 2.6% 1.8% 1.7% 3.0% 1.9% 2.6% 2.5% 1.9% 2.0% 2.0% 1.5% 2.2% 1.6% 2.4% 2.9% 2.3% 2.1% 2.3% 1.8% 2.3% 2.0% 2.6% 2.7% 1.9% 2.1% 1.5% 1.7% 2.2% 0.0% 2.0% 2.3% 2.1% 2.0% 1.8% 1.4% 1.7% 0.3% 1.7% 2.4% 2.0% 1.8% 1.9% 1.6% 1.9% 0.4% 1.9% 11.1% 8.8% 2.9% 4.2% 9.6% 8.3% 3.2% 3.6% 9.7% 8.4% 3.3% 3.8% 4.9% 6.7% 3.8% 3.6% 5.2% 5.8% 3.2% 3.7% 3.8% 5.5% 3.2% 3.5% Data As of: September 12, 2007 Source: Wachovia Corp. Wachovia Economics Group 13 Interest Rate Outlook Due to the downside risks to growth, the Fed should cut rates again in October. Most major foreign central banks likely will keep rates on hold for the foreseeable future. In sum, interest rate differentials likely will not move back in the dollar’s favor for some time. Wachovia International Interest Rate Forecast (End of Quarter Rates) United States Japan Euroland U.K. Canada 1 2007 Q4 5.08% 0.90% 4.20% 5.90% 4.60% Q1 4.93% 0.90% 4.20% 5.75% 4.60% 3-Month LIBOR 2008 Q3 Q2 4.88% 4.88% 1.10% 1.10% 4.20% 4.20% 5.40% 4.90% 4.60% 4.60% 2009 Q4 4.88% 1.10% 4.20% 4.90% 4.60% Q1 5.13% 1.10% 4.20% 4.90% 4.60% Q2 5.38% 1.10% 4.20% 4.90% 4.60% 2007 Q4 4.90% 1.70% 4.40% 5.10% 4.50% Q1 4.90% 1.80% 4.60% 5.00% 4.60% 10-Yr Government Security 2008 Q3 Q2 Q4 5.00% 5.00% 5.00% 1.90% 1.95% 2.00% 4.70% 4.75% 4.75% 4.90% 4.80% 4.80% 4.70% 4.75% 4.75% Q1 5.10% 2.00% 4.70% 4.90% 4.70% 2009 Q2 5.20% 1.95% 4.65% 5.00% 4.65% Q3 5.30% 1.90% 4.60% 5.10% 4.60% Data As of: Sept 12, 2007 Wachovia Economics Group 14 Wachovia Major Currency Outlook (End of Quarter Rates) 2007 Q4 2008 Q1 Q2 2009 Q3 Q4 Q1 Q2 Q3 Major Currencies Euro ($/ €) U.K. ($/ £) U.K. (£/ €) Japan (¥/ $) 1.42 2.05 0.69 115 1.44 2.06 0.70 112 1.46 2.07 0.71 110 1.47 2.08 0.71 108 1.48 2.09 0.71 106 1.49 2.09 0.71 105 1.50 2.10 0.71 104 1.50 2.10 0.71 104 Other Industrialized Canada (C$/ US$) Switzerland (CHF/ $) Norway (NOK/ $) Sweden (SEK/ $) Australia (US$/ A$) 1.00 1.18 5.40 6.50 0.88 0.98 1.16 5.30 6.35 0.90 0.97 1.14 5.20 6.25 0.91 0.96 1.12 5.10 6.20 0.92 0.95 1.10 5.00 6.15 0.93 0.95 1.08 4.90 6.10 0.93 0.94 1.07 4.80 6.00 0.94 0.94 1.07 4.80 6.00 0.94 1 Data As of: October 8, 2007 Source: Wachovia Corp. Wachovia Economics Group 15 Wachovia Emerging Market Currency Outlook 2007 Developing Economies Mexico (MXN/ $) Brazil (BRL/ $) Poland (PLN/ $) Russia (RUB/ $) Turkey (TRY/ $) South Africa (ZAR/ $) China (CNY/ $) India (INR/ $) Korea (KRW/ $) Singapore (S$/ US$) Taiwan (TWD/ $) 1 2008 2009 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 10.90 1.85 2.65 24.75 1.18 6.90 7.40 39.25 920 1.48 32.50 10.80 1.80 2.60 24.25 1.16 6.80 7.25 39.00 910 1.46 32.25 10.70 1.75 2.55 23.75 1.14 6.70 7.15 38.75 900 1.44 32.00 10.60 1.72 2.50 23.50 1.13 6.65 7.00 38.50 890 1.43 31.75 10.50 1.70 2.45 23.25 1.12 6.60 6.85 38.25 880 1.42 31.50 10.45 1.67 2.42 23.00 1.11 6.55 6.70 38.00 875 1.41 31.25 10.40 1.65 2.40 22.75 1.10 6.50 6.50 37.75 870 1.40 31.00 10.40 1.65 2.40 22.50 1.10 6.50 6.40 37.50 870 1.40 30.75 Data As of: October 8, 2007 Source: Wachovia Corp. Wachovia Economics Group 16 ABS Issuance USD Billions $300 Growth Sustained Remains Below Trend The Dollar Could PCE Continues to Strengthen if Risk Maintain Strength Taking Becomes Rampant Again. Residential Weakness Yet to Infect Economy $300 $250 $250 $200 $200 $150 $150 $100 $100 $50 $50 $0 $0 Jan-2006 Apr-2006 Jul-2006 Oct-2006 Jan-2007 Apr-2007 Jul-2007 Source: Asset-Backed Alert and Wachovia Corporation Wachovia Economics Group 17 Value of Assets at the End of 2006 in trillions of dollars $16 Growth Sustained Remains Below Trend Foreign Investors PCE Continues to Will Not Likely Begin Maintain Strength to Dump U.S. Assets. $12 $12 $8 $8 Other $4 Residential Weakness Yet to Infect Economy $16 $4 Stocks & FDI Official Bonds $0 $0 Foreign Assets Held by Americans U.S. Assets Held by Foreigners Source: U.S. Department of Commerce and Wachovia Corp. Wachovia Economics Group 18 The Large Current Account Deficit in Conjunction with Narrowing Interest Rate Differentials Have Weighed on the Dollar. Although the Current Account Deficit Will Gradually Shrink, Interest Rate Differentials Are Not Likely to Move Back in the Dollar’s Favor Anytime Soon. Summary In Addition, Reduced Issuance of Structured Fixed Income Products Will Give Foreign Investors Fewer U.S. Assets to Buy. The Dollar Could Strengthen, at Least Temporarily, if Risk Taking Becomes Rampant Again. The Probability of a Dollar “Meltdown” Is Rather Small. Wachovia Economics Group 19 Economics Group Appendix Comprehensive Coverage of the U.S. Economy Monthly Economic Forecast Weekly Analysis & Outlook Timely Commentary on Daily Economic Data Releases Macro Level Coverage of Major Foreign Economies Macro Forecasts of 11 Economies Monthly Forecasts of 19 Dollar Exchange Rates Weekly Analysis & Outlook Regional and MSA Level Expertise Extensive Coverage Across the Wachovia Footprint Ground level Analysis & Commentary of Local Markets Coverage Across CIB Industry Groups Regular Commentary on Economic Developments by Industries Economics Group Coverage U.S. Macro Economy Global Economies U.S. Regional Economics Industry Real Estate Industrial Growth Consume r & Healthcare Retail Media Financial Tech Energy & Power Services Wachovia Economics Group 20 Economics Group Publications Appendix A Sampling of Our Recent Special, Regional & Industry Commentary Distribution Lists Monthly Outlook Weekly Economic & Financial Commentary Special Reports Economic Indicators Global Commentary Regional Commentary Chief Economist List To join any of our research distribution lists please email us: [email protected] Recent Special Commentary Date October-02 September-25 September-21 September-20 September-19 September-18 September-18 September-14 September-10 August-17 August-16 August-14 August-14 August-10 August-10 August-10 August-02 August-02 August-01 July-31 July-27 July-27 July-13 July-12 July-09 July-02 Title Will the Consumer Remain Resilient Amid Subprime Woes? Authors Vitner & Khan State Personal Income - Second Quarter 2007 California Employment - August 2007 Corporate Credit: Insights from the Flow of Funds The Fed Still Has More Work To Do FOMC Meeting - September 18, 2007 Charlotte -The Challenges of Growth - September 2007 Structed Finance and the Outlook for the Dollar OFHEO House Price Index Vitner & York Vitner & York Silvia Silvia, Vitner & York Sivlia Sivlia Bryson Vitner & York Federal Reserve Cuts Discount Rate Volatility of Foreign Investment Housing Chartbook - August 2007 Global Mortgage Market Exposure Federal Reserve Acts to Provide Liquidity Global Chartbook - August 2007 Energy Forecast Chartbook - August 2007 Which Economies Would Lose Most From a Credit Crunch? June Housing Data Wrap-up State Employment Roadmap: June 2007 Silvia & Bryson Bryson Vitner & York Bryson Vitner Schenker Schenker Bryson Vitner & York Vitner & York Private Markets, Risk and The Housing Correction Risk Shocks and Currency Markets Georgia' s Economy Finally Bounces Back Energy Forecast Chartbook - July 2007 Global Chartbook - July 2007 Alabama Enjoys A Stealthy Economic Boom Economics as a Core Element in Due Diligence Silvia Bryson Vitner & York Schenker Schenker Vitner & York Silvia Wachovia Economics Group 21 Economics Group Appendix John E. Silvia, Ph.D. Mark Vitner Jay H. Bryson, Ph.D. Chief Economist Senior Economist Global Economist 704.374. 7034 [email protected] U.S. Macro Economy Interest Rates Monetary Policy 704.383.5635 [email protected] U.S. Macro Economy Real Estate Regional Economics: State & MSA Level 704.383.3518 [email protected] Global Economies Foreign Exchange Sam Bullard Huiwen Lai, Ph.D. Anika Khan Economist Quantitative Analyst Economist 704.383.7372 [email protected] Desk Operations Financial Services 704.715.7415 [email protected] Quantitative Macro-Economic Modeling 704.715.0575 [email protected] U.S. Macro Economy Consumer & Retail Non-residential Real Estate Azhar Iqbal Adam G. York Tim Quinlan Quantitative Analyst Economic Analyst Economic Analyst 704.383.6805 [email protected] Quantitative Macro-Economic Modeling 704.715.9660 [email protected] U.S. Macro Economy Real Estate Industrial Growth & Services 704.383.9613 [email protected] U.S. Macro Economy Wachovia Corporation Economics Group publications are distributed by Wachovia Corporation directly and through subsidiaries including, but not limited to, Wachovia Capital Markets, LLC, Wachovia Securities, LLC and Wachovia Securities International Limited. The information and opinions herein are for general information use only. Wachovia does not guarantee their accuracy or completeness, nor does Wachovia assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. © 2007 Wachovia Corp. Wachovia Economics Group 22