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Deutsche Bank sees US inflation threat declining

Journalist-turned-economist Marshall Gittler, the Singapore-based chief Asian strategist for Deutsche Bank private wealth management, recently sat down with `Taipei Times' staff reporter Amber Chung and shared his insights into monetary policy trends and global investment strategy for Taiwanese investors

By Amber Chung  /  STAFF REPORTER

Marshall Gittler, chief Asian strategist for Deutsche Bank Private Wealth Management, says inflation is probably a bigger problem in Asia than in the US.


Taipei Times: The new US Federal Reserve (Fed) Chairman Ben Bernanke said in his first testimony before Congress earlier this month that US economic growth remained on track and hinted at further tightening-up on concern over an overheating economy that could inflame inflation. Where will the US benchmark interest rate go in the next 12 months from the current level of 4.5 percent?

Marshall Gittler: It has been in our view that the Fed would stop before half-percentage point hikes, as the inflation is coming down and so are oil prices. Despite some consensus forecasts that put the benchmark interest rates at 5 percent this year, we think the monetary authority would stop hikes earlier than the market has expected. We think the Fed will raise rates one more time but a level of 5 percent is unnecessary.

The inflation outlook is relatively benign, as producers have had a hard time in pushing pricing increases through pass-through, in part due to globalization and the increasing supply of labor around the world.

Oil prices, that bear on inflation, are coming down with a forecast of average US$55 per barrel this year, which makes us less concerned about the oil prices. The demand for oil did not increase that much, while psychological factors in worries about insufficient supply boosted prices.

Another reason is the inverted yield curve. I don't think the Fed would want to push the yield curve into such inversion and keep it there. The inverted yield curve is the distortion of the market that causes long-term interest rates to be lower than they should have normally been.

[Editor's note: Inverted yield curve means an unusual situation in which long-term interest rates are lower than short-term ones, reflecting concerns about future economic uncertainty and suggesting an oncoming economic slowdown.]

TT: What course will Asian countries' monetary policy take in response this year?

Gittler: Inflation is probably a bigger problem in Asia than in the US, because of increasing money supply caused by intervention in the foreign exchange market. We have seen rising inflation in a number of Asian countries. Therefore monetary policy in Asian countries, like Thailand, Indonesia and Japan, is expected to be tightened up this year.

They would need to narrow the interest rate spread compared with the US so we expect interest rate hikes throughout the year. But, of course, if the US stops raising rates, it will be easier for Asian countries to stop hikes.

TT: How will Asian currencies move in the next 12 months?

Gittler: We think the US dollar has to fall further this year. It did not weaken last year because of the interest rate hikes. This year will finally be the year for the greenback to go down, given the US trade deficit issue. From historical experiences, the downtrend of the US dollar will not stop until the currency becomes 25 percent undervalued. Asian currencies will have to strengthen this year because they are where the US trade deficits come from.

We divided Asian currencies into three groups based on foreign exchange reserves accumulation as a percent of gross domestic production. Structurally undervalued currencies comprising the Chinese yuan and Malaysian ringgit; cheap but cyclically sensitive, including the NT dollar, the Korean won and the Singaporean dollar; and the less externally oriented, including the Thai baht and Indonesian rupiah.

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