HSBC forecasts further falls for the US dollar

Senior economists love to cover all possibilities - and one-time banking economist Federal Reserve Chairman Alan Greenspan is the greatest master of this art - but HSBC's US Economist Ian Morris was unable to remind entirely ambiguous this week on his tour through the Gulf States.

'The US dollar has been in a bear market for three years, and we think it has another three years to go,' he said. 'We are forecasting $1.40 to the euro by the end of the year.' However, he was more evasive when it came to the vexed question of whether the US is about to enter a recession.

'We are not forecasting a recession,' he said. 'But if you look at the figures in our forecast you can see that it will be impossible for them to be this high in three years, so that suggests that something bad will have to happen to bring them down.'

Indeed, the subtext of Mr. Morris' argument on the US economic outlook is definitely bleak. His lucid analysis moves swiftly from a housing bubble and its effect on consumer behavior to a likely bust and the maintenance of low interest rates to keep consumer's afloat amid a sea of negative housing equity.

'Long term rates in the US are still low and that tells you that the market is expecting debt to be a burden on the economy and that the economy just will not be able to stand higher rates.'

Accordingly he thinks any rise in short-term bond yield this year is a buying opportunity in view of the longer-term outlook. But low interest rates combined with substantial capital loss on housing do appear depressingly like Japan in the 1990s, although a repetition of the 80% loss of property values is perhaps unlikely.

Mr. Morris has an impressive presentation which summarizes the negatives for the US economy and concludes that a hard landing is required to fix the US balance of payments. From this analysis it is hard to believe that the US economy is not living on borrowed time as well as money and that both are now running out.

If this pessimism proves correct then $1.40 may not be the end of the US dollar's decline, but this takes us outside the parameters of Mr. Morris's report.