New market forecasts – an even stronger dollar ahead

We have revised up our GDP forecasts for the US and Japan. (See our latest US Economic Outlook and Japan Economics Weekly.) At the same time, we have reviewed our projections for currency, bond, equity and commodity markets. The new market numbers are presented in the table at the bottom of the next page. There are two main changes. First, we are adopting an even more upbeat view on the dollar, which we now think could reach parity against the euro by the middle of next year. Second, we expect US Treasury yields to start rising towards the end of 2011 as Fed tightening draws closer. Otherwise, we have tweaked our forecasts for equities, but not turned positive despite the rosier nearterm economic outlook. We also continue to think that commodity prices will fall further.