Salient to Investors:

David Bloom et al at HSBC said:

  • A sustained rise in the dollar may be insufficient to push inflation back to target in countries struggling with the threat of deflation, but it could buy them time and help prevent inflation expectations becoming permanently detached from target.
  • History suggests a 20% rise in the dollar is possible as it will again be the strongest major currency in 2015.
  • Dollar strength this time is unlikely to be tripped up by the US current-account deficit getting too large like it did in the strong dollar periods of the early 1980s and late 1990s – today’s deficit is down to near 2% of GDP from almost 6% in 2006.
  • HSBC report only 8 of 34 economies monitored have inflation above their target, with expectations of a drop to just 3 in 2015.
  • It would take a 20% rally to halve a 2% inflation forecast.
  • This is a currency war where stealing inflation rather than growth is the goal.

Michala Marcussen at Societe Generale says commodity exporters will face a headwind from a higher dollar, despite the currency effect no longer being as big now, while currency weakness elsewhere could breed complacency among countries who should be revamping their economies.

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