the outlook for the dollar in 2008 jay h. bryson, global economist october 9, 2007

The Outlook for the Dollar in 2008

Jay H. Bryson, Global Economist

October 9, 2007

2Wachovia Economics Group

Growth Sustained

Remains Below Trend

PCE Continues to Maintain Strength

Residential Weakness Yet to Infect Economy

Source: Federal Reserve Board

US Trade Weighted Dollar Major Index March 1973 = 100

70

75

80

85

90

95

100

105

110

115

2000 2001 2002 2003 2004 2005 2006 2007

70

75

80

85

90

95

100

105

110

115

Major Currency Index: Oct @ 74.3

The Dollar’s Slide Has Renewed in Earnest This

Year.


Growth Sustained

Remains Below Trend



Source: U.S. Department of Commerce and Wachovia Corp.

Current Account DeficitQuarterly in Billions of Dollars, Seasonally Adjusted

-$240

-$220

-$200

-$180

-$160

-$140

-$120

-$100

-$80

-$60

-$40

-$20

$0

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

-$240

-$220

-$200

-$180

-$160

-$140

-$120

-$100

-$80

-$60

-$40

-$20

$0

Balance on Current Account: Q2 @ $-190.8 B

The Current Account Deficit Likely Will

Remain “Large” For Some Time.


Growth Sustained

Remains Below Trend



Source: Department of Commerce and Wachovia Corp.

Purchases of U.S. Assets by the Foreign Private SectorBillions USD

-$50

$0

$50

$100

$150

$200

$250

$300

$350

2002 2003 2004 2005 2006 2007

-$50

$0

$50

$100

$150

$200

$250

$300

$350FDI: Q2 @ $73.6BPortfolio Investment: Q2 @ $227.5B

Foreign Purchases of

U.S. Assets Are Starting to Trend A Bit

Lower.


Growth Sustained

Remains Below Trend



Source: Department of the Treasury and Wachovia Corp.

Foreign Purchases of U.S. Securities 12-Month Moving Sum, Billions of USD

-$200

$0

$200

$400

$600

$800

$1000

$1200

98 99 00 01 02 03 04 05 06 07

-$200

$0

$200

$400

$600

$800

$1,000

$1,200Private: Jul @ $994 BillionOfficial: Jul @ $216 Billion

Purchases of U.S. Assets by the Foreign

Private Sector Significantly Exceed Official

Purchases.


Growth Sustained

Remains Below Trend



Source: Department of the Treasury and Wachovia Corp.

Foreign Purchases of U.S. Securities by Type 12-Month Moving Sum, Billions of USD

-$100

$0

$100

$200

$300

$400

$500

$600

98 99 00 01 02 03 04 05 06 07

-$100

$0

$100

$200

$300

$400

$500

$600Treasury: Jul @ $155 BillionCorporate: Jul @ $474 BillionEquity: Jul @ $210 BillionAgency: Jul @ $154 Billion

Purchases of Fixed Income Securities Are Significantly Larger Than Purchases of

Stocks.


Growth Sustained

Remains Below Trend



Source: Department of Commerce and Wachovia Corp.

U.S. Purchases of Foreign AssetsBillions USD

-$50

$0

$50

$100

$150

2004 2005 2006 2007

-$50

$0

$50

$100

$150FDI: Q2 @ $71.5BPorfolio Investment: Q2 @ $88.1B

U.S. Purchases of Foreign Assets Are Trending Higher.


Growth Sustained

Remains Below Trend



Source: U.S. Department of Commerce and Wachovia Corporation

The Current Account Deficit

Should Get Smaller Going

Forward.

Real Exports & Imports of GoodsYear-over-Year Percent Change of 3 Month Moving Average

-20%

-10%

0%

10%

20%

1998 2000 2002 2004 2006

-20%

-10%

0%

10%

20%

Exports: Jul @ 9.1%Imports: Jul @ 2.2%


Growth Sustained

Remains Below Trend



Source: Bloomberg LLP and Wachovia Corp.

Central Bank Policy Rates

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2000 2001 2002 2003 2004 2005 2006 2007

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%US Federal Reserve: Oct @ 4.75%Bank of England: Oct @ 5.75%ECB: Oct @ 4.00%Reserve Bank of Australia: Oct @ 6.50%

Interest Rate Differentials Have Moved Against the Dollar.


Growth Sustained

Remains Below Trend



Source: Global Insight and Wachovia Corporation

Dislocations in Credit Markets Could Cause

Growth to Slow.

U.S. Corporate Bond Spreads (basis points, over U.S. Treasury yields)

100

150

200

250

300

350

400

1996 1998 2000 2002 2004 2006

100

150

200

250

300

350

400


Growth Sustained

Remains Below Trend



Source: Department of the Treasury and Wachovia Corporation

Reduced Issuance of Structured Fixed Income Products Will Give Foreigners

Less U.S. Securities to

Buy.

Foreign Purchases of U.S. Securities by TypeUSD Billions

$0

$250

$500

$750

$1,000

$1,250

July 2004 - June 2005 July 2005 - June 2006$0

$250

$500

$750

$1,000

$1,250Corporate ABSAgency ABSCorporateAgencyTreasuryEquity


Growth Sustained

Remains Below Trend



Source: Bloomberg LLP, Morgan Stanley Capital International, and Wachovia Corp.

Emerging Markets Stocks & US Stocks(index, Jan 2003 = 100)

0

50

100

150

200

250

300

350

Jan 2003 Jan 2004 Jan 2005 Jan 2006 Jan 2007

0

50

100

150

200

250

300

350

MSCI Emerging Markets (Local)S&P 500

Stock Market Returns Abroad, Especially in

Emerging Markets, Have Been Superior, Than in the

U.S.


(Year-over-Year Percentage Change)

GDP CPI2007 2008 2009 2007 2008 2009

Global 4.4% 4.0% 4.2% N/ A N/ A N/ AMajor Economies

United States 2.0% 2.5% 2.9% 2.7% 2.3% 2.4%Eurozone 2.5% 1.9% 2.3% 1.9% 2.1% 2.0%

Germany 2.6% 2.0% 2.1% 2.1% 2.0% 1.8%France 1.8% 2.0% 2.3% 1.5% 1.8% 1.9%Italy 1.7% 1.5% 1.8% 1.7% 1.4% 1.6%

UK 3.0% 2.2% 2.3% 2.2% 1.7% 1.9%Japan 1.9% 1.6% 2.0% 0.0% 0.3% 0.4%Canada 2.6% 2.4% 2.6% 2.0% 1.7% 1.9%

Developing EconomiesChina 11.1% 9.6% 9.7% 4.9% 5.2% 3.8%India 8.8% 8.3% 8.4% 6.7% 5.8% 5.5%Mexico 2.9% 3.2% 3.3% 3.8% 3.2% 3.2%Brazil 4.2% 3.6% 3.8% 3.6% 3.7% 3.5%

1Data As of: September 12, 2007

Wachovia International Economic Forecast

Global Growth Should Remain

Solid.

Source: Wachovia Corp.


Due to the downside risks to growth, the Fed should cut rates again in October.

Most major foreign central banks likely will keep rates on hold for the foreseeable future.

In sum, interest rate differentials likely will not move back in the dollar’s favor for some time.

Wachovia International Interest Rate Forecast(End of Quarter Rates)

3-Month LIBOR 10-Yr Government Security2007 2008 2009 2007 2008 2009Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

United States 5.08% 4.93% 4.88% 4.88% 4.88% 5.13% 5.38% 4.90% 4.90% 5.00% 5.00% 5.00% 5.10% 5.20% 5.30%Japan 0.90% 0.90% 1.10% 1.10% 1.10% 1.10% 1.10% 1.70% 1.80% 1.90% 1.95% 2.00% 2.00% 1.95% 1.90%Euroland 4.20% 4.20% 4.20% 4.20% 4.20% 4.20% 4.20% 4.40% 4.60% 4.70% 4.75% 4.75% 4.70% 4.65% 4.60%U.K. 5.90% 5.75% 5.40% 4.90% 4.90% 4.90% 4.90% 5.10% 5.00% 4.90% 4.80% 4.80% 4.90% 5.00% 5.10%Canada 4.60% 4.60% 4.60% 4.60% 4.60% 4.60% 4.60% 4.50% 4.60% 4.70% 4.75% 4.75% 4.70% 4.65% 4.60%1Data As of: Sept 12, 2007

Interest Rate Outlook



Wachovia Major Currency Outlook

(End of Quarter Rates)2007 2008 2009

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Major CurrenciesEuro ($/ €) 1.42 1.44 1.46 1.47 1.48 1.49 1.50 1.50U.K. ($/ £) 2.05 2.06 2.07 2.08 2.09 2.09 2.10 2.10U.K. (£/ €) 0.69 0.70 0.71 0.71 0.71 0.71 0.71 0.71Japan (¥/ $) 115 112 110 108 106 105 104 104

Other IndustrializedCanada (C$/ US$) 1.00 0.98 0.97 0.96 0.95 0.95 0.94 0.94Switzerland (CHF/ $) 1.18 1.16 1.14 1.12 1.10 1.08 1.07 1.07Norway (NOK/ $) 5.40 5.30 5.20 5.10 5.00 4.90 4.80 4.80Sweden (SEK/ $) 6.50 6.35 6.25 6.20 6.15 6.10 6.00 6.00Australia (US$/ A$) 0.88 0.90 0.91 0.92 0.93 0.93 0.94 0.94

1Data As of: October 8, 2007


2007 2008 2009

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Developing EconomiesMexico (MXN/ $) 10.90 10.80 10.70 10.60 10.50 10.45 10.40 10.40Brazil (BRL/ $) 1.85 1.80 1.75 1.72 1.70 1.67 1.65 1.65Poland (PLN/ $) 2.65 2.60 2.55 2.50 2.45 2.42 2.40 2.40Russia (RUB/ $) 24.75 24.25 23.75 23.50 23.25 23.00 22.75 22.50Turkey (TRY/ $) 1.18 1.16 1.14 1.13 1.12 1.11 1.10 1.10South Africa (ZAR/ $) 6.90 6.80 6.70 6.65 6.60 6.55 6.50 6.50China (CNY/ $) 7.40 7.25 7.15 7.00 6.85 6.70 6.50 6.40India (INR/ $) 39.25 39.00 38.75 38.50 38.25 38.00 37.75 37.50Korea (KRW/ $) 920 910 900 890 880 875 870 870Singapore (S$/ US$) 1.48 1.46 1.44 1.43 1.42 1.41 1.40 1.40Taiwan (TWD/ $) 32.50 32.25 32.00 31.75 31.50 31.25 31.00 30.75

1Data As of: October 8, 2007


Wachovia Emerging Market Currency Outlook


Growth Sustained

Remains Below Trend



Source: Asset-Backed Alert and Wachovia Corporation

The Dollar Could

Strengthen if Risk Taking

Becomes Rampant Again.

ABS IssuanceUSD Billions

$0

$50

$100

$150

$200

$250

$300

Jan-2006 Apr-2006 Jul-2006 Oct-2006 Jan-2007 Apr-2007 Jul-2007

$0

$50

$100

$150

$200

$250

$300


Growth Sustained

Remains Below Trend



Source: U.S. Department of Commerce and Wachovia Corp.

Foreign Investors Will Not Likely

Begin to Dump U.S. Assets.

Value of Assets at the End of 2006in trillions of dollars

$0

$4

$8

$12

$16

Foreign Assets Held by Americans U.S. Assets Held by Foreigners

$0

$4

$8

$12

$16

Other

Stocks & FDI

Official

Bonds


The Large Current Account Deficit in Conjunction with Narrowing Interest Rate Differentials Have Weighed on the Dollar.

Although the Current Account Deficit Will Gradually Shrink, Interest Rate Differentials Are Not Likely to Move Back in the Dollar’s Favor Anytime Soon.

In Addition, Reduced Issuance of Structured Fixed Income Products Will Give Foreign Investors Fewer U.S. Assets to Buy.

The Dollar Could Strengthen, at Least Temporarily, if Risk Taking Becomes Rampant Again.

The Probability of a Dollar “Meltdown” Is Rather Small.

Summary


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Appendix


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Date Title Authors

October-02 Will the Consumer Remain Resilient Amid Subprime Woes? Vitner & Khan

September-25 State Personal Income - Second Quarter 2007 Vitner & YorkSeptember-21 California Employment - August 2007 Vitner & YorkSeptember-20 Corporate Credit: Insights from the Flow of Funds SilviaSeptember-19 The Fed Still Has More Work To Do Silvia, Vitner & YorkSeptember-18 FOMC Meeting - September 18, 2007 SivliaSeptember-18 Charlotte -The Challenges of Growth - September 2007 SivliaSeptember-14 Structed Finance and the Outlook for the Dollar BrysonSeptember-10 OFHEO House Price Index Vitner & York

August-17 Federal Reserve Cuts Discount Rate Silvia & BrysonAugust-16 Volatility of Foreign Investment BrysonAugust-14 Housing Chartbook - August 2007 Vitner & YorkAugust-14 Global Mortgage Market Exposure BrysonAugust-10 Federal Reserve Acts to Provide Liquidity VitnerAugust-10 Global Chartbook - August 2007 SchenkerAugust-10 Energy Forecast Chartbook - August 2007 SchenkerAugust-02 Which Economies Would Lose Most From a Credit Crunch? BrysonAugust-02 June Housing Data Wrap-up Vitner & YorkAugust-01 State Employment Roadmap: June 2007 Vitner & York

July-31 Private Markets, Risk and The Housing Correction SilviaJuly-27 Risk Shocks and Currency Markets BrysonJuly-27 Georgia's Economy Finally Bounces Back Vitner & YorkJuly-13 Energy Forecast Chartbook - July 2007 SchenkerJuly-12 Global Chartbook - July 2007 SchenkerJuly-09 Alabama Enjoys A Stealthy Economic Boom Vitner & YorkJuly-02 Economics as a Core Element in Due Diligence Silvia

Distribution Lists Recent Special Commentary

A Sampling of Our Recent Special, Regional & Industry Commentary

Economics Group Publications Appendix

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John E. Silvia, Ph.D.Chief Economist

Economics Group

704.374. 7034 [email protected]

U.S. Macro EconomyInterest Rates Monetary Policy

704.383.5635 [email protected]

U.S. Macro EconomyReal EstateRegional Economics: State & MSA Level


Global EconomiesForeign Exchange

Mark VitnerSenior Economist

Jay H. Bryson, Ph.D. Global Economist

Sam BullardEconomist


Desk OperationsFinancial Services


Quantitative Macro-Economic Modeling


U.S. Macro Economy Consumer & RetailNon-residential Real Estate

Huiwen Lai, Ph.D.Quantitative Analyst

Anika KhanEconomist

Azhar IqbalQuantitative Analyst


Quantitative Macro-Economic Modeling


U.S. Macro EconomyReal EstateIndustrial Growth & Services


U.S. Macro Economy

Adam G. YorkEconomic Analyst

Tim QuinlanEconomic Analyst

Appendix

Wachovia Corporation Economics Group publications are distributed by Wachovia Corporation directly and through subsidiaries including, but not limited to, Wachovia Capital Markets, LLC, Wachovia Securities, LLC and Wachovia Securities International Limited.

The information and opinions herein are for general information use only. Wachovia does not guarantee their accuracy or completeness, nor does Wachovia assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. © 2007 Wachovia Corp.






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the outlook for the dollar in 2008 jay h. bryson, global economist october 9, 2007

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