Market Outlook for 2010

Written by Research | 04 January 2010

Inflation vs. Currency Reserves
including Gold Prices

Did the historic economic crisis left Americans with plenty of things to worry about? But is inflation one of them? These are the questions that has been left behind in 2009; as a new dawn in 2010 shows some brighter perspective for the US economy and the US Dollar at the same time.

Although, some may disagree to this notion that there may still be some lerking dilema behind the recovery. The answers to these questions will define the real stand of the Federal Reserve bank in this year. However, a pullback from an unprecedented level of monetary stimulus came just in time versus the worst financial panic since the Great Depression has always been the case made by some expert economist.

On the upfront, it appears true. The most recent report by the University of Michigan consumer survey showed a 0.2 percentage point decline in expected inflation one-year out, to 2.5 percent. Market-based barometers and sentiment index have moved higher, although it may not be considered in the red.

Beneath the weak economic background and keeping prices in check at most times, economists and consumers are increasingly concerned about the continuous loss of the purchasing power of the US Dollar versus the other foreign currencies of the biggest trading partners in the competitive world where the very definition of inflation is mostly measured. According to some economic models, consumers do see that the prospect of future inflation has some implications for prices by itself. Once higher costs are taken for granted in most countries, they are more easily tolerated until such time that they realize that there is something more than what it feels inside the grocery or department store.

The price of gold, often viewed as a hedge against inflation, has set record after record, peaking above $1,226.38 an ounce last year before retreating to below $1,100. A recent JPMorgan survey of clients found that 61 percent expected U.S. inflation to be "above its target levels" between 2011 and 2014. Another consumer confidence survey, published by The Conference Board, showed Americans expect prices to climb a troubling 5.1 percent over the next 12 months.

That may seem surprising considering the world has faced a crippling financial crisis that many economists warned might lead to deflation. But it makes sense in the context of the extraordinary measures taken to halt the meltdown. Experts who have studied bouts of inflation, most common in poor or developing countries, say the makings of an inflationary psychology are already in place in the United States. It begins, they say, when unfathomably large figures are bandied about as if they were mere change.

The share of global foreign exchange reserves held in U.S. dollars declined in the third quarter of 2009; whereas the USDX registered witha 74.20 low, even as overall world reserves swelled to a record $7.5 trillion, International Monetary Fund data resource center. The IMF data showed the dollar's share of the roughly $4.4 trillion of world reserves of which the composition is known fell to 61.6 percent between July and September, from 62.8 percent in the prior quarter.

 The euro's share of known reserves edged up to 27.7 percent from 27.4 percent and the yen share rose to 3.2 percent from 3.1 percent, the data showed. Holdings of other foreign currencies as a reference to funds other than the dollar, euro, yen, sterling or Swiss franc -- showed the biggest shift. Though a small share of the known reserves, so-called other currency holdings rose to 2.9 percent from 2.2 percent.

The very propects of the US Dollar to move higher this 1st quarter of the year 2010 are more promising than ever. The relative strength of the USDX will continue as the end of the year of 2009 were just a bird's eye view of what is at stake for this year.

But the spill over of some economist may still be weary of this recovery. Of course, there will always be some major corrections along the way but the direcional movement of the prices and specially for commodities is to go higher. This outlook is more positive than most economist would say. That is why some traders and sophisticated investors are still not willing to put their investment funds into the trade until they see some considerable movements. 

As the market prices can swing dramatically and unexpectedly specially right after New Year where position adjustments are made that may eventually make the US dollar move with such volatility that it may drop and other European currencies may exactly do the opposite. These are very common in liquidity adjustments and the interbank dealers may have a dramatic push and pull strategies in place that may make retail and sophisticated investors drawback most postions on the start of the trading week.