Obama's Economic Stimulus Plan Gives Dollar Strong Start to 2009 on Hopes US Will Recover First

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The dollar rose in early January, as investors weighed the likely effects of president-elect Barack Obama's economic stimulus plan and as analysts said the United States could be the first major economy to recover from the global economic downturn.

"It's the start of a new year, and this year will turn out fine," says Michael Malpede, market analyst at online foreign exchange trading system Easy-Forex US, based in Chicago. "Fiscal policy was key to ending the Great Depression, and Obama's fiscal stimulus plans will be key to ending the current recession," he says.

The massive fiscal stimulus plans coming from the US government, Canada and Japan, coupled with declining credit-market stress and the sharp drop in energy prices, may spark a quicker economic rebound than many forecasters predict, according to Malpede. "The US was the first to cut rates and react to financial market stress," he says. "We may find the US leading the global economic recovery sooner than the pundits expect."

Resurgent demand from China and other emerging markets will boost demand for commodities, Malpede says. "The markets will bottom long before the recession ends," he says. "Commodities and stocks will rally in 2009, and the dollar will emerge as the preferred funding currency."

Reason for Optimism in New Year

Human beings tend to see the start of each calendar year in terms of a new beginning, and there is some reasonable logic to being optimistic this year, says David Gilmore, economist and partner at Foreign Exchange Analytics, based in Essex, Connecticut. "Washington may get it more right on the policy front in 2009 than it did in 2007 and 2008 and actually keep the economy from falling into the black hole of deflation," he says.

Obama, with an electoral mandate, is planning the largest fiscal stimulus since the 1950s in an attempt to get the economy growing again by filling the gap the private sector is leaving as households and firms pull back in the face of a serious recession, according to Gilmore.

With the Troubled Asset Relief Program (TARP) balance at $350 billion and plans from the Obama administration to add another $900 billion or more in new spending and/or tax cuts, there is serious firepower aimed at the economy, Gilmore says.

Meanwhile, the Federal Reserve will be expanding its balance sheet, or essentially printing money, by buying securities directly from the market. "Moreover, the policy response is global-every major economy is throwing fiscal and monetary accommodation at this problem-and will up the odds of the response working," Gilmore says. "So I am of the belief that riskier assets and currencies should outperform, at least through the first quarter [of 2009] and possibly the second quarter. If I had to guess, the Obama honeymoon ends in late second quarter and sets the stage for new lows in equities in the second half of 2009 and a rebound in risk-free assets,' he says.

Foreign Rate Cuts Help Dollar

The Fed is done cutting interest rates, with the range for the federal funds rate extending down toward zero. "So all the action on [international] spreads for shortterm interest rates will be in favor of the greenback, at least for the next few months, as other central banks gradually work their official rates down toward zero," says Carl Weinberg, chief economist at Valhalla, New York-based High Frequency Economics. "The time for bullishness about the dollar is hardly over," he says.

While the Bank of Japan has no room left to cut interest rates, the yen is also due for a big drop against the dollar, according to Weinberg. Year-end paydowns of carry trades generated massive purchases of yen by foreigners, but this is unlikely to continue, he says. "Thus, we expect the yen to turn the corner and to dive against the dollar early this year," he says. Carry trades involve borrowing in low-yielding currencies to invest in higher-yielding currencies. …