The Expectations of the Dollar Essay Example | Topics and Well Written Essays - 2000 words

The Expectations of the Dollar - Essay ExampleInterest-rate futures demonstrate that the traders are authentic the Fed will growth its benchmark to 4.75 percent on March 28, and predict about a 65 percent chance of another increase to 5 percent at the May meeting. save the outlook was not the same say in October 2005 when Fed was expect to go in for have dosages of increase in interest rate in keeping with the trend began since June 2004. The vaulting horse had then risen 2.3 percent against the yen since the end of June 2005. The horse ran its trey straight quarterly gain, reported in October 2005, against the yen, the longest winning streak since 2001, as the Federal Reserve stuck to its policy of measured increases in interest evaluate. The markets had then judge the dollar to rally to about 115 yens. The yield advantage of 10-year US Treasury notes with Japan had averaged 2.87 percentage points in 2005 year and reached as much as 3.27 percentage points on March 28 2005. As a result of these Japanese investors were buying the dollar to purchase overseas assets, such as Treasuries beef up interest in dollar. As compared to this The Bank of Japan had kept rates near zero since 2001.US Rate increases had helped notch an 11 percent gain in the dollar vs. the yen. However for the first time ,in this scenario Bank of Japan indicated that the yen whitethorn be supported by indicating a timetable for ending its policy of holding interest rates near zero.BOJ had also decided to stop pumping money into the sparing and to recommence forecasting of inflation after a seven-year absence. The risks to the US dollar in 2006 are being widely debated. Last year too Bill Gates, Warren Buffett and George Soros had predicted a crash of the US dollar which, however, did not materialize. However sufficient arguments exist today on why the US dollarwill stopdefying gravity and fall this year. As stated abovein the last few weeks the dollar has kept on falling relative t o the Euro and Yen, as expectations of relative short term interest rate differentials and growth rates are turning against the U.S. US slow down, which may or may not trigger global slow down, is quite a probability with risks of a disorderly adjustment triggered by the bursting of the US house bubble and the stagflationary effect of another oil shock driven by supply tightness and a confrontation with Iran. Moreover a monstrous trade deficit of 7% of GDP has led to an unsustainable accumulation of net foreign liabilities (Roubini, 2006). These combined with domestic slowdown leave out weak signals for dollar with slight corrections in or around the two expected step-ups. This outlook would run concurrently to the period required to smoothen out these imbalances. This is expected to last the entire of the remainder portion of 2006 at the least.Theoretical Setting Post Bretton Woods period was a period of fixed exchange rates and primary forex market analytics concerned the effect s of discrete policy induced changes in the level of exchange rates-be it a devaluation or appreciation. National economies and the global economy as result