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Davos experts bullish about dollar

Fed plans to keep interest rates near zero and talk of another round of QE dented the dollar on currency markets, but many at Davos think the euro has bigger problems

The announcement that the US Federal Reserve plans to keep interest rates ultra-low until the second half of 2014 was the talk of Davos on Thursday morning.

News that US monetary policy will remain firmly biased towards boosting growth certainly had the effect of taking attention away from the euro, which had been battered by negative comments from George Soros, Nouriel Roubini and other economists attending the World Economic Forum. Not only will the Fed keep interest rates low but its chairman, Ben Bernanke, made it clear he was prepared to turn on the electronic printing presses for a further dose of quantitative easing. With Washington uneasy about the durability of America’s economic recovery and monetary policy to remain loose, forex dealers did not need much persuading to dump the dollar.

Even so, the majority of experts at a private discussion in Davos said they thought the dollar would strengthen in the course of 2012. That was not because they were especially bullish about the prospects for the US but rather because they were worried about the possibility of a breakup of the euro.

European policymakers have been insisting in Davos that the single currency will survive in its current form and that the worst is now over: the rest of the world is less convinced.

Still, in the event that Europe did get its act together in the first half of 2012, providing a long-term solution to Greece and giving some real breathing space to Italy and Spain, the dollar bulls could turn out to be wrong. Even tentative signs in the first few weeks of 2012 that the eurozone crisis is stabilising has helped the euro to appreciate.

If, and it remains a big if, fears of a breakup start to recede, safe haven flows into the dollar will start to dry up. After all, the US remains a country with both a big budget deficit and a big trade deficit. The northern half of Europe contains some of the world’s biggest creditor nations: Germany, the Netherlands and Sweden among them. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds