Interest-rate differentials between the U.S. and the euro zone will remain at least as wide as at present, fueling purchases of U.S. securities by foreign investors, both public and private.
We doubt that economic activity in the euro zone will afford the ECB scope to raise the refinancing rate beyond 2.50 percent.
The speculation was reinforced by the report (Wednesday) that consumer prices in the US fell by 0.1 percent on a seasonally adjusted basis in December.
Given the prospect that the Japanese economy will remain on a path of expansion, we believe that Japanese investors will continue to take advantage of higher yields abroad, particularly in the United States.
We have a good opportunity for the dollar to do better than it seems for some time. The pickup in yield is quite wide.
Deflation is very entrenched in Japan and even over the longer term the scope for changes in monetary policy is very limited. The yen is likely to head lower.
