US dollar may weaken if QE3 is announced: Barclays Cap

Desbarres expects the FOMC to launch an open-ended asset purchase programme and he believes the US dollar could weaken further if the Fed eases further and goes ahead with QE3.

Also read: Asian shares inch up, euro zone and Fed QE3 eyed

Here is the edited transcript of the interview on CNBC-TV18.

Q: We did see a fairly decent run-up in the euro and a fall in the dollar index, why don't we see that kind of a performance in the currency space in Asia?

A: As you pointed out correctly, we did see quite a sharp sell-off on the US dollar after the payroll numbers, where the market seems to be pricing in QE3 as a near certainty when the FOMC meets later this week. This expends a trend whereby euro-dollar has been pushing higher at a very steady and measured pace since July and that accelerated somewhat on Friday.

The feed through to Asian currencies has been more tepid and Asian currencies have appreciated against the US dollar, Taiwan Dollar, Philippine peso having decent sessions, but on the whole the game has been incremental rather than significant. I think part of the reason for that is that the positive for Asian currencies from potential QE3 is somewhat undone by the ongoing story of slowing Chinese growth.

We saw that with the data out over the weekend and the data for exports and imports released earlier today. I think the slowdown in economic growth and lack of policy stimulus in China is acting like a bull unchained on Asian currencies and that is why we are not seeing great rallies in currencies and we are seeing equities flat-line.

Q: What about the euro, what is your view on the euro because we have seen quite a strong run up on an intraday basis on Friday, 1.28?

A: It has been a reasonably sustained rally, more impressive in recent sessions and with the potential for QE3 being announced on Thursday, we think that euro-dollar could push higher.

So far we think that it has been only a certain part of the investor community that has been pursuing euro-dollar high including hedge funds and model accounts. If real money starts to get involved in this trade, we could see euro dollar pushing higher.

But let us not forget that Thursday's decision is not necessarily a slam-dunk, there are a number of reasons to think that this is still a difficult decision for the FOMC. If you look at the US economy today, if you look at the economic and financial conditions today, they are far stronger than when the US announced QE1 and QE2.

There is still this residual risk that the FOMC extends interest rate guidance but does not announce a full fledged QE3 programme, in which case we would see euro-dollar coming off. I still think that like last week, there is a lot of data of event risk, the market seems to be pricing in some other benign outcomes but again this is not a 100% probability scenario.