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Outlook 2012: Global Markets

A Special Report from David Hightower, Principal at the Hightower Report


The Dollar will likely start out 2012 as the safe-haven “currency of choice,” with global risk concerns a dominant theme. The US economy is expected to hold onto lukewarm growth levels, though a spike in unemployment readings could erode market and consumer sentiment. While the US budget battle affected global markets for a period of weeks last summer, any further problems could have a negative impact on US credit ratings and in turn put pressure on equity and bond markets. There is a chance that little progress will be made until after the election in November. But as long as
overseas risk concerns dominate the headlines, the Dollar could continue to build on its recent strength and rise above the early 2011 highs.

While some progress was made late in 2011, the Euro will continue to be negatively affected by the EU sovereign debt crisis. The problem has spread beyond peripheral Euro zone nations, and has the potential to severely harm the global economy if conditions continue to deteriorate. The markets will be looking for decisive action from European leaders, or the entire concept of the Euro may be in jeopardy. While economic conditions in the Euro zone may improve from their current sluggish levels, any chance for an extensive recovery in the Euro will require some resolution to the debt problems. Otherwise, the Euro may tumble far below the 130.00 level during the early part of 2012.

After already dealing with damage to infrastructure and industry from the Tohoku earthquake and tsunami, the Japanese economy is facing a huge negative impact from the record strength of the Yen. Japanese GDP is directly related to export-driven industries that need a weaker Yen to remain competitive in the global marketplace. The key weapon that Japanese officials have deployed to weaken the Yen has been central bank intervention, and this is expected to continue as long as Yen values remain at historically high levels. If the Japanese Yen does make a longer-term move to the downside, a large portion of recent gains may quickly be lost.

The Swiss Franc is expected to remain pegged to the Euro until there is tangible progress in the Euro zone debt problems – it is hoped this will prevent a flight to safety into the Franc if the crisis flares up again during 2012. Given the recent lack of growth in the Swiss economy, there is a strong chance that the current peg rate of 1.2 Swiss/Euro may increase during the first quarter of 2012.

The British Pound may begin the year by gaining ground on the other European currencies, but a key factor for 2012 will be the amount of quantitative easing the Bank of England uses to stimulate the UK economy. If those totals exceed market expectations, the British Pound could slide well below the 150.00 level by mid-year.

“Commodity” currencies such as the Canadian Dollar and Australian Dollar will reflect the prospects for global growth and broad market commodity strength during 2012. If there are indications that the Chinese economy is heading for a “hard landing”, the Australian Dollar may sink well below the 95.00 level, as China is a major customer for their natural resources.

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