Why do I read the MS Global Economic Forum too late?

After I wrote the previous piece, I stopped to see if the Morgan Stanley Global Economic Forum had anything to say about the USD/EUR exchange rate. Why didn't I read this before?

Rick Bremer sees things mostly positive, but not completely. Note that Rick Bremer tends to be optimistic, although he's been at least partially right of late.

The Dollar and the Economy

Notwithstanding that the dollar's 20% traded-weighted decline over the past 28 months has been orderly, that US asset markets have outperformed most other big markets in local currency terms this year, and that the dollar's benefits for the US economy make dollar-denominated assets more attractive, worries persist that the dollar's decline will turn vicious and raise interest rates as investors leave our markets. It's not hard to see why many analysts are concerned: Our huge budget deficits and unprecedented dependence on external sources of saving leave the dollar vulnerable. The ongoing decline in US private capital inflows underscores that dependence.

But because the plusses still outweigh the minuses, I don't see these dependencies as clear and present dangers for our markets, as long as global investors retain confidence in our policies. However, the threat of resurgent protectionism that my colleague Steve Roach has documented does worry me. If it translates into further action, it would undermine both our economic performance and the attractiveness of our markets. And investors' patience with our imbalances won't last forever. In my view, if we do not address our huge budget deficits in the next couple of years, then confidence in US policies may begin to ebb.

Additionally, Stephen Jen sees the risk of a Dollar/Euro overshoot to 1.28, causing real damage to the Euro economies. And Eric Chaney thinks that this could cause Euro economies growth to go negative.

Euroland: Euro, Nash, and Santa Claus

This brings me to the real point: the risks to our European recovery scenario. In the short term, the risks are probably tilted to the upside. October industrial production data from Germany, France and Italy have all surprised on the upside, and our call for Q4 GDP growth at a 3% annualized rate might soon look conservative. Provided that the German tax cuts are confirmed, final demand should get another boost in the course of the first quarter. That being said, if the euro TWI crosses 105 and climbs towards 110, the consequences will be straightforward: GDP growth will stall if not turn negative in the second or third quarter of next year. A "triple dip" would be even more likely if the Nash equilibrium included a "punishment" dimension in the ECB's reaction function, the punishment being either to tighten prematurely or to talk up the euro simply by not even trying to talk it down.