Spencer expects that sufficient progress will have been made on resolving the financial sector vulnerabilities that domestic demand will strengthen in the second half of the year. He expects the Bank of Korea will raise interest rates by 25 basis points very late this year, initiating a modest tightening of monetary policy in 2005. "With the US dollar under pressure and Korea running a larger current account surplus, the Korean won is likely to appreciate modestly this year," he said.

However, he said that  some risks remain, which could lead to a disappointing outcome. "These include a highly indebted household sector, which may continue to depress consumption, financial sector vulnerability, particularly in the credit card sector, and significant political uncertainty surrounding the election," Spencer told an audience of 200 representatives of the financial services industry in Korea.

According to the Bank's findings, stronger growth in the major industrial countries provides a highly supportive environment for Asia's export-sensitive economies. Export growth is expected to rise sharply in the first half of this year providing a strong boost to growth in the region. In addition, consumption spending will be higher this year than last year, largely because of last year's SARS epidemic, which had depressed demand for many months, said Spencer

Deutsche Bank's global forecasts provide a very favourable view of the year ahead, with most economies enjoying faster growth with little sign of rising inflation. In the US, Deutsche Bank forecasts GDP growth of 5.2% this year and 4.3% in 2005. With the economy growing reasonably strongly, the Federal Reserve is expected to start bringing interest rates up to take off the monetary stimulus they have applied since 2001. The first rate hike is expected in June, and Deutsche Bank expects the benchmark Fed Funds rate to rise 100 basis points (1%) this year and 300 basis points (3%) in 2005.

While Deutsche Bank also sees growth in the group of European Union countries rising this year - albeit more moderately, to only 1.8% -- they do not expect the European central bank to change its benchmark refinancing rate until 2005, and then only by 50 basis points. Likewise, in Japan, despite another year of strong growth this year - Deutsche Bank forecasts growth of 2.3% -- the Bank of Japan is not expected to raise interest rates, Spencer said.

Martin Hohensee, Deutsche Bank's Head of Fixed Income and Credit Research in Asia, said that  global market trends are expected to be dictated by fast growth in the US a continued weakening trend for the US dollar, and the US presidential election.

"US credit spreads should guide Asian spreads tighter in 2004, with declining default rates, market-induced deleveraging in recent years, declining equity volatility, and favourable technicals. In this environment, Deutsche Bank expects Korean subordinated debt - on the cusp between investment grade and speculative grade - will perform well in 2004, once the LG Card situation is resolved," said Hohensee. He also expects the Korean yield curve to steepen more than the US Treasury curve. Although 2-year bonds look cheap whether swapped into dollars or held in Won, the 10-year sector looks vulnerable to increased supply including KRW 5 - 10tr of mortgage backed bonds. Ten-year bond yields are expected to reach 6.50%.

"Deutsche Bank expects these to result in poor supply-demand conditions for US Treasuries, which will push US bond yields higher.  Furthermore, although equities do not look inexpensive, they still have room to rally relative to Treasuries in this environment," said Hohensee. He added that Deutsche Bank forecasts a steepening of the US yield curve in 2004 with 10-year bond yields rising to 5.50% - 5.75% by the end of December.

Euro-denominated bonds, with yields currently equal to US Treasuries offer far better fundamental value not only because of their currency exposure but because bond yields in the EU are forecast to rise only about 25 basis points this year to 4.5%. A stronger Euro will restrain inflation risks in the EU, helping to support a flattening of the EUR yield curve relative to the US curve.

Peter Redward, Senior Currency Strategist with Deutsche Bank, said in his presentation that he expects the decline in the value of the U.S. dollar to continue, driven by a widening of the current account deficit to 5% of GDP this year, a higher fiscal deficit, and relative low interest rates.

"Deutsche Bank forecasts the Euro to rise to between USD1.40 and USD1.50 and the Japanese yen to fall below 90/USD in 2005/06," said Redward. He added that he expect that with rising exports and capital inflows, Asian currencies are likely to appreciate modestly in 2004.