Global market angst over the US subprime mortgage crisis, among other factors, has prompted Morgan Stanley to update its currency forecasts, says Stephen Jen, the bank’s global head of currency research.

MS has revised its end-2007 forecast for the euro-dollar exchange rate from to $1.33, from $1.28 previously. The dollar-yen forecast is unchanged: Y118 by end-2007. Part of this adjustment reflects the state of the sub-prime market, but Jen says it also a formal expression of recognition “that US real money diversification may be a structural negative for the dollar”. Read more

As long as demand in China remains robust, the Aussie dollar should be a “major beneficiary”, says Stephen Jen, Morgan Stanley’s global head of currency research. In fact, the Aussie seems to be Jen’s favoured currency, as it is “well supported” and “likely to outperform the euro, pound and NZ dollar, even when the dollar reasserts itself”, he says.

China and Australia have a “remarkable symbiotic trade partnership”, notes Jen. “Australia’s terms of trade (ToT) have risen by 104 per cent in USD terms in the past four years. Not only has demand from China pushed up base metals and coal prices, but Australia’s import prices have also been well restrained because of China.” Read more

Well what do you know? All sorts of people, governments and institutions have been blamed for dollar weakness. But contrary to popular presumption, says Stephen Jen, Morgan Stanley’s global head of currency research, US real money managers are the biggest dollar diversifiers, not the Asian central banks.

Controlling about $20,700bn in assets – four times the size of the total global official foreign reserves – US real money managers have been diversifying aggressively out of the US since 2003, says Jen. And if you buy his line that ‘currency diversification equals currency weakness’, this explains why the dollar has shown a gradual downtrend since then – and why it is so weak now. Read more