Currency watch: IMF slashes growth projections

The main economic news this week has been the latest round of International Monetary Fund growth projections which saw every country’s surveyed GDP projections for 2011 and 2012 downgraded.

Growth in the UK was moved to 1.1% in 2011 and cut to 1.6% in 2012, while Germany’s 2011 projection was sliced to 2.7% and its 2012 figure to 1.3%.

Similar downgrades were experienced elsewhere, with the IMF putting the chance of the UK economy moving into a double-dip recession at 18%, while the US’ chances were estimated to be at 38%.

There was also a warning for the UK that austerity measures may need to be scaled back if growth is seriously hit.

“Seriously” was not clearly defined, however, and politicians on both side of the fence have been beating each other up ever since the report’s publication.

Meanwhile, the Fed moved ahead with “Operation Twist” – a plan to stimulate consumer demand by driving long-term interest rates lower.

The plan will see $400 billion of short-term debt sold to finance the purchase of longer-term debt.

Purchasing debt drives yields lower and this should therefore allow consumers to refinance mortgages at lower rates, businesses to invest in capital programs, and the economy to push on from there. Or that’s what the theory says, of course.

It is our belief that the “Twist” operation is merely a sideshow to the circus that is Europe, and that the market is still looking for support in that arena before it will run higher.

One thing that the further weakening of monetary policy in the US does is increase pressure on the ECB to cut rates after the two rate rises earlier on in the year. This will keep pressure on the euro in the short term.

All this is having the effect of exacerbating the recent volatility seen in the markets over the past few weeks and we would recommend that treasury departments hedge upcoming exposures immediately.

Jeremy Cook is chief economist at World First foreign exchange