MS: USD may weaken more

Morgan Stanley thinks that US dollar will continue correcting down against most currencies. The specialists point out that market players are still very long on USD.

In addition, news reports suggest that the FOMC will consider strengthening its forward rate guidance to incorporate some of Chairman Bernanke’s dovish sentiments.Specifically, the FOMC may lower its unemployment target to 6%. “By formalizing Fed’s recent concern about too-low inflation and a premature tightening in financial conditions, the new guidance framework should extend the USD depreciation. Italso should further underline the data-dependency of Fed policy, increasing the market sensitivity to downside US data surprise.”

However, MS thinks that USD may be bottoming versus Japanese yen and British pound. “The prospect of the Bank of England formally adopting a forward rate guidance framework with the publication of its Inflation Report on August 7 suggests that short cable positions would soon be attractive. And the third straight week of sizable foreign bond purchases hints that the next leg of JPY weakness driven by Japanese investors may be at hand,” says the bank.   

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