SINGAPORE (AFX-ASIA) - UBS Warburg chief economist George Magnus expects the U.S. Federal Reserve to cut interest rates by 50 basis points at the forthcoming Federal Open Market Committee meeting, which is scheduled to begin later today.
"I think they are going to cut (interest rates by) about 50 basis points in the meeting tomorrow. If it isn't 50, then it would be 25 basis points and then (another) 25 to come by August," he said. Magnus said he expects the Federal Reserve to stop cutting interest rates at least for the time being as it would probably want to see how the previous easing of monetary policy will have an effect on the economy in the second half of this year.
"If the numbers (economic growth) don't get better in the period August, September, October, its very likely that the Fed will reduce interest rates. So, we may be even speaking of, later this summer, of the possibility of a 3.0 pct funds rate at the end of this year," Magnus said.
He said there was a possibility that the U.S. Federal Reserve would cut interest rates to 2.5 pct, but such a move would be a drastic one.
"If the (U.S.) economy fails to pick up in the second half of this year, or only generates growth of 0-1 pct, and consumers don't spend their tax cuts, I'd expect the Fed to cut interest rates by another 100 basis points, maybe down to around 2.5 pct."
"But I have to stress that that is a pretty drastic outcome, that's not a central forecast," he said.
Magnus said he expects interest rates to fall in Europe by about 75 basis points in the second half of this year.
"The ECB may cut interest rate by about 25 basis points in time for the G8 summit," he said.
Magnus also expects the U.S. dollar to fall further given its weak fundamentals, but the euro and the yen are expected to perform even worse.
"The near term outlook for the euro is for it to go back down, not hugely, but maybe to around 80 euro cents by September and around 85 euro cents by the end of the year," he said.
"But the biggest change may be the U.S. dollar/yen ... (possibly a) 130 dollar/yen by September and 135-140 dollar/yen by the end of the year," he said.
Magnus said that he expects Asian currencies in general to "come down if the yen falls" due to the contagion effect, or deteriorating economic fundamentals.
"Where Japan competes head to head in Asian countries, lets say for example with Korea, that is a big problem for Korea," he said. "Where it's contagion, it's most likely to be reflected in terms of the market reaction, in terms of driving out Hong Kong's forwards, maybe in putting the ringgit under a bit of pressure," he said.
Magnus said the situation is worse for Asia since it is not in control of the key events, which are taking place outside the region.