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All eyes on the US, which holds the key Back  
Currencies outlook
Eddie Murphy, Vice President, Treasury Citibank NA

EUR/USD 1.0000
GBP/EUR 0.6600
EUR/JPY 110.00
USDJPY 110.00

Looking Back: Our fears on USD were pretty much borne out. On the basis of competitiveness the dollar is clearly overvalued and the overvaluation is no longer obscured by a booming domestic economy. The rush from risk in asset markets is clearly hindering the flows on which financing of the US current account deficit depends. Sterling tracked USD pretty much as we expected, although U.K. manufacturing is clearly suffering at current levels of EUR/GBP. We overestimated the momentum in the Japanese economy and its slowing has clearly raised the risk profile of public and private sector Japanese debt.

Looking Forward: We expect USD to loose further ground in the next quarter. Slower than expected growth, diminished risk appetite and lower oil prices are all working against the USD. EUR is looking more attractive, as the private and public sectors do not have any of the imbalances that worry investors in the U.S. and Japan. A little boring perhaps, but that is what the market will like in coming months. Our JPY forecast is based on Q1 repatriation flows and fears that the yen has sold off too fast. Overall, until world growth and asset markets remain on the defensive EUR will be attractive. On a trade weighted basis sterling remains overvalued will have a hard time maintaining its traditional position in between USD and EUR.

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