GLOBAL ECON­OMY: Tug-of-war be­tween euro and US dol­lar will dom­i­nate

Finweek English Edition - - COLUMN - GRETA STEYN

The rand has so far shrugged

off euro weak­ness

A YEAR AGO there were ex­pec­ta­tions that in­ter­est rates in the United States would rise in 2010. The London Fi­nan­cial Times re­ported in an early piece com­par­ing the sit­u­a­tion to 1994 and warn­ing that mar­kets could be caught by sur­prise by a tight­en­ing US Fed­eral Re­serve, which was a hope­lessly op­ti­mistic view of the path of re­cov­ery taken in the US. Hit by con­tin­ued fall­out from the hous­ing cri­sis and a stub­bornly high un­em­ploy­ment rate, the Fed even­tu­ally de­cided on fur­ther mon­e­tary pol­icy in Novem­ber last year through quan­ti­ta­tive eas­ing.

In the Eu­ro­zone, fore­casts were also hor­ri­bly wrong. No­body fore­saw the sov­er­eign debt cri­sis that led to big bailouts for Greece and Ire­land and con­tin­ued con­cern about Spain, Por­tu­gal and Italy. These wor­ries over­shad­owed a pleas­ing per­for­mance by Ger­many.

In emerg­ing mar­kets, the op­po­site was the case: peo­ple didn’t ex­pect the strong growth from those re­gions that oc­curred. In fact, so strong has growth been that some of these economies are now in dan­ger of over­heat­ing.

South Africa, it­self an emerg­ing mar­ket, wasn’t so lucky. At the start of the year it looked as if a growth rate of 3,5% could eas­ily be reached, which seemed to be con­firmed by a first quar­ter growth rate of 4,6%. How­ever, the rest of the year was a dis­ap­point­ment, with growth only reach­ing 2,8% in the sec­ond quar­ter and 2,6% in the third (All fig­ures are sea­son­ally ad­justed, quar­ter-on-quar­ter growth rates, un­less oth­er­wise stated). The SA Re­serve Bank hadn’t been ex­pected to cut in­ter­est rates at all last year. In fact, some econ­o­mists ex­pected an in­crease. In­stead, the repo rate was cut three times by a to­tal of 1,5 per­cent­age points.

What lies ahead? Will the eco­nomic re­cov­ery in the US gain trac­tion? Will the Eu­ro­zone debt cri­sis again roil the mar­kets? How will SA fare? In the US there have been fore­casts of higher growth, given the ex­ten­sion of the Bush tax cuts and other fis­cal mea­sures. The Bush tax cuts ap­plied to the rich and Pres­i­dent Barack Obama agreed to ex­tend them when they ex­pired, de­spite op­po­si­tion from within his own party. Obama hopes the ex­ten­sion of the tax cuts will pro­vide fis­cal stim­u­lus to the US econ­omy. At the same time tax cuts to poorer house­holds were also ex­tended, with the same aim.

Some an­a­lysts ar­gue the with­drawal of the US$800bn stim­u­lus spend­ing will be a drag on its econ­omy. But the tax cuts and other fis­cal mea­sures largely take care of the prob­lem. In fact, these tax cuts raise the fear that the US fis­cal deficit will be­come un­man­age­able. At 8,9% of gross do­mes­tic prod­uct over the past fis­cal year, the US fis­cal deficit looks dan­ger­ously Euro­pean in its scope. How­ever, the painful ad­just­ments have been post­poned and, over the short term, US growth is likely to pick up.

This view is fur­ther sup­ported by the Fed’s quan­ti­ta­tive eas­ing: the pump­ing of hun­dreds of bil­lions of dol­lars into the US bank­ing sys­tem through the Fed’s buy­ing of govern­ment bonds. Bank of Amer­ica ex­pects the Fed to ex­tend its bond buy­ing pro­gramme and buy a to­tal of $1 tril­lion of US trea­suries.

The pump­ing of money into the US bank­ing sys­tem has a de­press­ing ef­fect on the green­back. That’s why China can ar­gue the US is also a cur­rency ma­nip­u­la­tor. The Chi­nese, of course, are the world’s cham­pion cur­rency ma­nip­u­la­tors with an overly weak ren­minbi.

How­ever, the de­press­ing ef­fect on the US dol­lar is off­set by the turmoil in the euro area. The Eu­ro­zone sov­er­eign debt cri­sis has a de­pre­ci­at­ing ef­fect on the euro. Both the US dol­lar and euro can’t de­pre­ci­ate at the same time. There will be a tug-of-war to see which cur­rency weak­ens.

So far, the rand has been buoyed by the Wal­mart takeover of Mass­mart and has shrugged off the euro’s weak­ness. But rand strength is un­likely to lead to fur­ther in­ter­est rate cuts this year, un­less it re­ally sprints ahead. Mean­while, SA’s growth rate is likely to have been slightly be­low 3% last year and could im­prove to slightly above in 2011.


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