Forex Blog: Currency Trading News & Analysis.

January 16th 2006

Economists remain ambivalent towards USD in 2006

As 2006 sets in, economist and analysts are beginning to release their forecasts for the USD in 2006. Their models vary widely, as some place more emphasis on economic indicators (namely the current account balance), while others merely reflect assumptions for interest rate differentials. According to the latter type, the USD is actually undervalued, by as much as 10%. Such models posit that the current discrepancy is merely a premium of uncertainty surrounding current monetary and economic conditions. Models based on the current account balance, in contrast, suggest the USD is heavily overvalued. The economists behind these models believe that 2006 could be a rough year for the USD, as the willingness of foreigners to finance the rising US twin deficit begins to wane. The Economist reports:

According to economic theory, it is the widening of interest-rate differentials that temporarily strengthens the exchange rate. Over time, an international difference in interest rates is offset by a drop in the currency with the higher interest rate.

Read More: The greenback’s sinking feeling

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