Foreign investors have helped buoy US growth and avoid a dollar depreciation
The likelihood of a dollar crisis seems to be increasingly remote. According to economic indicators published recently, manufacturing activity is likely to have remained strong in January.
In the Beige Book, the Federal Reserve deems economic conditions to be good - and even up - since early December when the Book was last published. Foreign investors have not been insensitive to the vigour of US growth. This growth has been driven by domestic demand and confirms that US businesses are in good shape and posting strong profits. Financial transactions between the US and the rest of the world show that foreign investors are still hungry for US assets, including equities. We therefore think that there is little chance of a general disaffection for the US dollar.
The slump in the US dollar following the presidential elections notwithstanding, this high growth potential, which is sustained by productivity gains, explains why the US remain a favourite market for financial investors.
On the other hand, we must not overreact to the improvement in the ISM index over the last two months, since it may be the result of temporary factors, such the accelerated depreciation measures which ended last 31 December. It is too early to expect this index to re-accelerate, particularly since oil prices have dropped only slightly from their record levels of last October. Accordingly, we believe that the cycle is continuing to mature without a hitch for the time being.
With the global economy still vigorous, the eurozone should continue to hold steady and thus avoid a recession. The French, German, Belgian and Italian confidence indicators to be released this week will provide a better idea of how external factors are underpinning European industrial activity. The only thing that has slowed manufacturing has been the combined effect of higher commodity prices and the rise of the euro late last year. These two shocks further depressed European business confidence which had already suffered from the substantial deterioration of the trade situation in 2002 and 2003. The negative impact of this on the labour market has weighed on European consumer spending.
German consumers were hit particularly hard, since they were also affected by the negative short-term impact of German reforms to ensure greater labour market flexibility. That said, the eurozone (including Germany) is not excluded from the global cycle and should benefit from its current dynamism.
Research and Strategy Team, Ixis Asset Management
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