At A1GLOBALINVESTOR we expect the main trend in the foreign exchange markets to be a weakening US$ for the foreseeable future. The current account deficit can only be stopped from further increasing by a lower exchange rate. The falling of the US$ will mainly occur against the Euro and the Asian currencies apart from the Chinese Yuan and the Japanese Yen. The Chinese are most likely to opt for a further small strengthening of the Yuan against the US$ until the end of 2006, to prevent protectionist measures by its main trading partners. China adopted a currency basket as a peg for the yuan. The currencies in the basket have been published but not the weight attributed to each of them. It is also assumed that the central bank has the possibility to not follow strictly the rate that is calculated by the basket. Otherwise it would be possible that a strengthening of the US$ against the other currencies in the basket results in a lower yuan against the US$, which would definitely meet some political resistance in the US. The Japanese yen will remain fairly stable against the US$ for the foreseeable future as the large current account surplus, the low inflation rate and the stabilizing economy supply a constant upside pressure on the yen. This pressure will be resisted, if necessary, by the Bank of Japan (BoJ), because in its fight against deflation and to support the export industry the BoJ can not afford a stronger yen. On the other hand it can not push the yen much lower as this would meet political resistance from the US and China. Therefore we expect the yen to trade between 105 and 115 yen against the US$ for 2006 and 2007.
For the Euro we expect an exchange rate of between 1.19 to 1.35 US$ per Euro for 2006, with the possibility of the US$ weakening further than this range in 2007 if the European economy keeps improving.