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Warning: Forecasts IEE

IEE Forecast: on a dollar exchange rate, OPEC conference, and session of FRS board, Bush's speech and meeting of G7.


Events of this week will leave the trace in 2005 World discussions around of problems with a dollar exchange rate became a key theme for economists. Their wave has come to Davos as well. Promptly fallen, the dollar has stopped the falling. Many analysts consider, it is not for a long period. In particular, Fred Bergsten, the director of the Institute of Economic (Washington), has said in Davos, that a crisis may burst at the nearest weeks or even days if the president of the USA will not undertake measures and reduce the deficiency of the state budget. According to the Reuters agency, deficiency of the US budget will come nearer to a record level and reach $427 billion.it means, that for its financing the USA should involve $ 5 billion daily (IEE Information for comparison: gross national product of Ukraine for all 2004 has made nearby $63 billion). Doubting the fiscal opportunities of Washington to overcome such a financial weight, the currency markets have hidden and are ready to decrease a dollar exchange rate. Their expectations are caused by such key factors as dynamics of FRS discount rate and ECB, and financial parameters-deficiency of the state budget and deficiency of the account of current operations, (the value of the latest has exceeded 6 % from gross national product of the USA), and also value of parameters of growth of the American economy: growth of gross national product (FRS beige book and reports of the Ministry of Trade); employment (quantity and dynamics of primary references on unemployment); indexes of business activity; inflations; recently data on housing construction have joined them. And certainly - dynamics of the prices for power resources, first of all, OPEC factor - the offer of oil in the world markets.Budgetary management of the US Congress also divides this point of view (falling a dollar exchange rate). It considers the influence of deficiency of the account of current operations, but believes, that the rate will be not crucial. It will be smooth, within two years, and without damage to national economy. It will be so because of:- expected profit from investments in the USA is higher, than in other economies;- other countries " can want to minimize risks " for their economy, not allowing decreasing the dollar too fast. It is the hint, that the countries with large currency reserves in dollars obviously will not want their depreciation as in that case their economy should pay for crisis import - the dollar depreciation.On the other hand, growth of the monetary offer as a result of long decrease in a discount rate in the beginning of 2000th made internal demand in the USA active. And in view of high real incomes of the American households, growth of effective demand will obviously promote transposition of capitals to non-residential firms to the USA. If Budgetary management of the US Congress considers so, there is much more in their arguments for smooth decrease in a dollar exchange rate, than on sharp - at operators of the market. Moreover, decrease in a dollar exchange rate will promote growth net-export and, accordingly, the growth of economy. Thus, the public sector of the US management shows power and, what is the main thing, confidence. It obviously is based on calculation and the verified strategy, and provides it with the initiative, unlike the market and other countries, which obviously lose it. It especially concerns the Europe and ECB.However the transparency of this situation is broken by a policy of the central bank of China, which has "adhered" Yuan. It in no way promotes the deficiency reduction of the balance of payments in the USA. Therefore this question most likely will be a point of issue at the G7 meeting. In these conditions there was an unsteady and temporary balance. OPEC has decided not to break it, and wisely pointed on FRS and "G7". Their decisions will be clear this week. Its 134-th conference has decided to keep an operating quota on the oil extracting, which equals 27 million barrels a day. They have explained, that the current prices for oil are high enough. " Now it is not the time to downturn quotas ", - so the Minister of Oil in Iran Bijan Zanganeh has told. Having reserved the right to correct the policy by phone before the next conference, which will take place on March 16 in Isfahan, OPEC has provided itself with a necessary corridor for maneuver in decision-making after this week. Thus, if the unsteady balance will be broken now, the responsibility for it will be on everybody, but not OPEC. But it does not miss the initiative for protection of the interests, though it had to offer temporary reduction of prices (on Friday). And still OPEC most likely will agree to decrease of quotas. It will be compelled to make such step, despite of recently made forecast of growth of demand for oil, especially in China. The reason for it is possible overproduction of oil in the second quarter. The influence of the oil factor for exchange rate is mediated through rates of economic growth. The growth of the world economic was provided first of all by economy of the USA (and only then China, etc. the countries). It was reached with great victims, and "oil" and "growth" have reached a critical level by mutual influence, though OPEC does not consider so. In spite of the fact that exhaustion of oil in the nearest decade will not come yet, the forecasts of Meddows and Forrester reports to the Roman club obviously start to come true.The second event of week, but not the last valuable, will be a session of FRS board on February 1-2. It should bring a decision on toughening monetary policy. As IEE predicted earlier and as practically all operators of the market expect, FRS should raise a discount rate on 0,25 %, having increased it up to 2.5 % that should promote strengthening of dollar. However the decrease of quotas for oil was also expected as almost inevitable decision on Sunday, January 30. If FRS raises a discount rate, all will occur the way it was expected. No especial changes in the market should occur over the weekend. However, FRS will find, that tomorrow's possible increase will appear too fast so will influence decrease in rates of economic growth, this increase can be postponed to the next session of the board. But in that case it will possible to expect an immediate attempt to lower a dollar exchange rate in the market. If the percent of increase will make 0,25 % all will be just vice versa. The rate can probably hold on any time, however here risks to infringe a neutrality of money will obviously increase. The pressure upon reduction of deficiency of the current account will increase too. (Reference: analysts of bank system of Ukraine on January 18, have expressed similarly, having completely supported IEE forecast)The next event, which can influence dynamics of a rate seriously, is the planned speech of the US president. It is business of politicians and political scientists to predict and make comments on it. It is interesting, what measures in reduction of deficiency of the state budget (or increases in its charges) it will promise.At the weekend Ministers of Finance and the Head of the central banks of G7 countries will gather in London for meeting. Ministers of Finance and the Heads of the central banks in Russia, China and India will also arrive. Predictably, depreciation of dollar will become the main item on the agenda of discussions at this meeting. Waiting for the events the dollar market is in a short corridor. It is difficult to refuse the forecast, that in a context of this issue, problems of both deficiencies will be mentioned at a meeting. It is also easy to guess, that the attempt to render effective influence on a policy of China concerning flexible policy of Yuan to dollar will be undertaken.Thus, considering recently expressed opinion of fourteen analysts, it is possible to predict, that China will appear under both external, and internal pressure upon its monetary policy. Probably as a result of this pressure, China will go on concessions. However if it will concede, it will be, as is thought, a psychological concession, as there are no signs for its economy overheat, certainly if nothing changes. China cannot make its economic growth slower. It speaks for the confident deployment of new structure of its economy, and a new technological ways. Income still has to grow for such population as Chinese. The country has even lower average incomes per capita than in Ukraine. Unless only growing dependence on energy carriers will act as the self-adjusting mechanism of its growth. All will depend on safety factor of its economy though it is always the more difficult for estimating, the less market institutionalism is. (Certainly, if the world economic will be broken in crisis, it should concern China too. Therefore to it that will weigh. Especially it will be difficult under influence of general attention.) Here such it will be, the forthcoming week. Influence of its events to some extent will necessarily be shown in present year 2005.

I.Makarenko,

IEE  

Posted on the website: 2005-02-01

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