Gray: Quantitative easing to start again in Q3

Miton manager Martin Gray shares his thoughts on the currency markets and why UK interest rate rises are more likely to come in years, not months.

It has taken a decade for the European Union to accept the euro is flawed.

The Greek economy became the first to be exposed to its failings against the Germanic core, to which each of its fellow currency-linked members must emulate.

Having recently banned short selling, as the US did in 2008, Germany's stance is spooking the market. What do the Germans know that we do not? Perhaps there are much bigger issues about to come to light, akin to the Lehman ‘era'.

No one wants to lend to anyone else, we have begun to witness that again in the eurozone with euribor trending higher. No one wants an IOU from club med.

At the moment the necessary political and fiscal central policies to correct this seem unlikely and a long way off. Drachma's and deutschmark's may see their day again.

We have already seen a devaluation of the pound and the euro, and no doubt that will help offset some of the economic woes. Will it be enough to ignite inflation?

Will we see interest rate rises? In both cases, the short term, we think no. There is too much risk to this delicate economy. Any fiscal tightening will choke what little signs of growth we have.

Our view is that quantitative easing will start again in Q3/Q4, and monetary policy will loosen even further in the UK. Any talk of interest rate rises is premature, possibly by a matter of years rather than months.

Regarding the US dollar, it is probably fair value at present but if markets continue to wobble, it will move higher.

If we see a return to 2009 bull markets then it is likely the dollar will weaken. I believe the former is more likely and so the dollar remains relatively attractive.

Martin Gray runs the Miton Special Situations and Strategic portfolios.