Euroland:
We are reducing our 2008 euro area GDP growth estimate to 1.0%, from 1.3% before, and lowering our 2009 forecast to 0.2%, from 1% previously. We are now looking for an outright contraction in economic activity, lasting at least until early next year, and believe that next year’s recovery will come later and be more muted.

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Currencies:
It is widely believed that (i) US interest rates will rise due to the large supply of public debt associated with financial assistance plans; (ii) the Fed will be compelled to ‘print money’ to inflate this debt away; and (iii) financial assistance plans will be dollar-negative. We disagree with all three popular presumptions.

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Currencies:
Most EM economies run C/A deficits, which we believe makes them vulnerable to sharp changes in capital flow trends. Further, in difficult times, EM investors tend to seek protection in the dollar. Moreover, a sharp fall in capital inflows could lead to policy conflicts, possibly further undermining domestic demand.

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