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Alan B'Stard MP

Us$ Decline Seen In U.s., Uk Divergence

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Federal Reserve Chairman Ben S. Bernanke and fellow central bankers gathering in Jackson Hole, Wyoming, are showing scant signs of reprising the coordinated stance they took fighting the worst financial crisis since the Great Depression as they deal with its aftermath. The danger is that such a disjointed approach will lead to volatile financial markets, a damaging drop of the dollar and slower global growth, Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pacific Investment Management Co., said in an interview.

“The question is not whether the dollar will weaken over time, but how it will weaken,†said El-Erian, a former deputy director of the International Monetary Fund whose firm runs the world's largest bond fund. “The real risk is that you will get a disorderly decline.â€

By the end of 2010, the euro will rise to about US$1.60, its highest since April 2008, while Canada's currency will appreciate to C$1.01 per U.S. dollar, its strongest since July 2008, as the U.S. is slow to tighten credit, said Sophia Drossos, co-head for global foreign-exchange strategy at Morgan Stanley in New York.

Bernanke, 55, and other policy makers, who meet on Aug. 20-22, are already staking out differing positions as they gain traction in their battle against a crisis that has cost financial companies worldwide about US$1.6 trillion in writedowns and losses. The U.S. economy is forecast to grow by more than an annualized 2 percent in the second half of 2009 compared with an average contraction of more than 4 percent in the last two quarters of 2008, according to a Bloomberg survey of economists.

Bank of England Governor Mervyn King expanded an unprecedented bond-purchase program by 50 billion pounds (US$82.7 billion) on Aug. 6 to 175 billion pounds, saying the recession was “deeper than previously thought.†Less than a week later, on Aug. 12, the Fed said it would slow its buying of US$300 billion in Treasury securities and finish by the end of October as the economy levels off. On Aug. 5, Bank of Israel Governor Stanley Fischer ended government-bond purchases as the economy resumed growing in the second quarter after contracting during the previous six months.

“What you would hope to happen is much better coordination internationally,†El-Erian said.

Such divergent approaches contrast with the united front central banks took in the wake of Lehman Brothers Holdings Inc.'s collapse last year, when the Fed, European Central Bank, Bank of England, Bank of Canada, Swiss National Bank and Sweden's Riksbank all cut interest rates on Oct. 8. The Fed also set up a record 14 swap lines with foreign central banks to provide them with dollars to ease a global liquidity squeeze.

The banks were forced to cooperate by the severity of the global credit crunch, said Peter Hooper, chief economist for Deutsche Bank Securities in New York and a former Fed official.

As the crisis ebbs, the desire to act in concert is likely to fade, Hooper said. The IMF forecasts the global economy will expand 2.5 percent next year after shrinking 1.4 percent in 2009.

“The biggest risk of central banks going at their own pace is currency overshooting,†Jim O'Neill, head of global economic research at Goldman Sachs Group Inc., said in an interview from London. Morgan Stanley's Drossos recommends buying the currencies of countries that are likely to be among the first to raise interest rates while selling those of nations that have used quantitative-type easing to pump liquidity into their financial systems. She puts Australia and Norway in the first group and the UK and the U.S. in the latter.

Nice to see the Chinese talking about the GFC in the past tense.

Not too congratulatory about the UK though.

Edited by Alan B'Stard MP

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