THE United States is poised to engineer a modest but slow economic recovery while Europe is moving towards stagnation and Japan will slip deeper into recession this year and next, say economists from US investment banks Smith Barney and Morgan Stanley.
The US dollar will rise against the deutschemark and remain stable against the yen, while the Bundesbank will be forced to ease interest rates.
Both banks predict an easing by the German central bank in the next few months, totalling 200 basis points - or two percentage points - by the end of the year.
Last night the Bundesbank announced it would cut its discount rate by 0.25 of a percentage point to eight per cent and its more market-sensitive Lombard rate by 0.5 of a point to nine per cent from today.
Federal Reserve policy is expected to remain unchanged in the medium term at least, possibly easing towards mid-year.
While the fundamental trend for both short and long-term interest rates was down, said Smith Barney's Mr Mitchell Held, in the current economic environment, the Fed's interest rate policy was likely to remain unchanged.
But if the economy started to lag disappointingly over the next few months, then there could be room for a 25-basis point reduction in the Federal funds rate and a 50-basis point cut in the discount rate, he said.