The US Federal Reserve and the European Central Bank are expected to start edging interest rates higher this year, but in historical terms rates will remain low, according to the OECD.
The Organisation for Economic Cooperation and Development, in its semi-annual Financial Market Trends report, also said Asian countries will have to assume a greater role in compensating for the steady weakening of the US dollar.
It noted that certain Asian nations have been intervening heavily in exchange rate markets to stem the appreciation of their own currencies.
The report said forward interest rates and futures contracts suggest that market participants expect rates to rise some time in the second quarter in the US and later in the year in the 12-nation euro zone. Markets also see a high probability of another rise in British borrowing costs in the near future, and there are indications as well that rates in Japan might pick up slightly this year, according to the report.
But rates will remain at relatively low levels for some time in the major economies, it said. 'Policy rates are likely to remain low, as the US economy has yet to show significant improvement in employment, and in Europe, growth remains sluggish,' the OECD said.
The decline of the dollar against the euro has already provided a further easing of monetary conditions in the US and a tightening of conditions in the euro zone, it noted.
'Growth in many continental European countries remains somewhat sluggish. Recently released figures for several European countries suggest that growth remains below expectations, as the strong euro has put some pressure on exports while household spending remains scant,' it said.
But the study found that recent data suggest the Japanese economy may now be on a firmer path to recovery, while fourth quarter 2003 gross domestic product performance in the US is also consistent with an an ongoing recovery - even if US growth slowed from the robust pace recorded in the third quarter last year.
US GDP momentum slowed to an annualised 4.1% in the fourth quarter from an exceptionally high 8.2% in the third. Recent falls in confidence data in a number of countries do not yet mark a trend, and consumer and business confidence figures continue to reflect a positive economic outlook, the OECD said.
The impact of euro strength on euro zone exports has so far been more modest than expected, it said. The report cited a JP Morgan Chase estimate that exports fell 4-8% in the fourth quarter but said most companies had fared better than investors expected. A stronger currency tends to make exports more expensive and less competitive.
The dollar's weakness, meanwhile, has so far not led to any major reversal in the US current account deficit. The current account is a broad mesure of foreign trade, comprising goods, services and certain financial and investment flows. The falling dollar, which should boost US exports, had been seen as helping to shrink the current account shortfall.
The OECD said Asia would have to bear a greater share of the burden of exchange rate adjustment if the US is to reduce its projected 2004 current account deficit of $585 billion. The Asia Pacific region is projected to have a current account surplus of $238 billion, compared with a surplus of just $49.7 billion for the euro zone.
Some Asian countries have intervened heavily in foreign exchange markets to slow the appreciation of their currencies against the dollar in order to spur exports and growth. Hedging activities by euro zone exporters may also be delaying a further dollar decline in the short term, the OECD said.
