Analysis: Is it the end of the dollar's decline?

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The US Fed's latest statement, while promising a continuation of zero rates, has indicated that quantitative easing that is printing more dollars will wind down. The dollar has surged to 14 month highs after that statement. In an interview with CNBC-TV18, Alex Barrett, Head of Global Client Research and Strategy on Foreign Exchange, Commodities, Fixed Income and Credit Markets for Standard Chartered Bank, discusses it.

Here is a verbatim transcript of an exclusive interview with Alex Barrett on CNBC-TV18. Also watch the accompanying video.

Q: The Fed's recent statement indicates that there is probably going to be a winding down of quantitative easing. The Dollar Index has shot up to more than 77 which is a 14 month high. How does this change the global trends? Until now it was very easy guess of short dollar-long equities, short dollar-long most of the commodities. Do you think that this now ends completely?

A: I do not think it ends completely. This is probably a temporary bounce for the dollar. There is a lot of optimism going through on the US economy at the moment. It was reasonably down showing that it is still going to be a long-time before interest rates are likely to rise. There is no change in the language used yesterday for that point.

The markets are starting to get ahead of themselves in terms of pricing in rate hikes as early as April-June 2010. We think that's totally off the table and actually probably more likely. As we see the effect of the stimulus package start to wares off next year, we are expecting to get a weaker economy in the US. So we may get some good numbers for the fourth quarter this year. As we roll into next year, we are expecting to see disappointment. As that sets in, we are expecting the dollar to setback into a downtrend. They may have to do another stimulus package or just certain policy economy potentially jobs etc and that will be weighing US dollar going forward.

Q: This puts a very serious question mark on the way you see economic recovery in the US. If that is the case then what is your call on base metals? For the next one quarter, how would you see commodities panning out and indeed for the next 12 months?

A: Over the next quarter, we could see some short-term weakness. Over the 12 months or even two-three years, we are reasonably bullish on commodities because maybe we are seeing a big change between the growths in the East and the West. Growth in East is still pretty strong. I was seeing good growth coming through China and India.

Even if we get a short-term dropdown in some of the commodity prices, it will be much of a recovery. We are expecting commodity prices pickup on a weaker dollar because the commodities still priced in dollars. We think it will still be very robust growth in China and India.

Q: Would you put question marks on Indian and China's growth?

A: We are reasonably positive on China. However, we are definitely not looking for them to boom. We cannot see a boom coming through in the East unless there is a strong recovery in Europe. We will get reasonably robust growth. We are going to see a return to 12-14% growth in China. We think that growth would peak in China next year at 9.5%.
They would start drifting down as the weakness in rest of the world comes through. We believe that India has probably got a slight upward trend because the investment is going in. We think it's going to raise a metabolic rate of growth for India, which should be positive. So we are expecting India to grow faster than China in 2011-2012.

Q: Where does that leave the Indian rupee? If you are continuing to see weakness in the US dollar and are going to see robust growth, there will be some kind of capital flows in India. What is the prognosis on the rupee?

A: The rupee is one of our favourite currencies along with the Korean Won. A huge amount depends on dollar. We can still see a risk aversion move where the dollar picks up. We got carry trade going on where people are borrowing dollars and investing in just about anything. If that unwinds then the dollar will appreciate against just about everything.
Over the medium-term, we expect the dollar-rupee to go lower because that takes the dollar element of a major setback in risk aversion. We have been recommending people to sell euro and buy Indian rupee.