(March 14 – 10:20 ET) – With world economic growth decelerating, central banks around the globe are now in an easing mode, say TD economists in their new monthly Global Markets report.

Since the start of the year, monetary authorities in the United States, Canada, Japan, the United Kingdom and Australia have reduced borrowing costs, and more reductions are coming says TD.

“The Fed slashed rates by 100 basis points in January and the easing cycle is likely only half complete,” says Craig Alexander, senior economist at TD Bank. The U.S. central bank is expected to reduce borrowing costs by 50 bps at the March 20 FOMC meeting and a further 50 bps by the end of June.

“Fixed-income markets have already priced in a large part of that easing, implying that the downside for U.S. and Canadian bond yields is only modest from current levels,” notes Alexander. Although the U.S. economy is seen flat for the first half, the easing is expected to set the stage for a recovery by the fourth quarter. Bond yields are expected to begin rising in the third quarter and remain on an upward track heading into 2002.

Canada’s economy is on a firmer footing than the U.S., but it is faltering too. “The Bank of Canada has responded to the prospect of slower economic growth by reducing overnight rates by 75 bps, and another 50 bps is in store in the coming months,” says Alexander. “The coming weakness in the Canadian economy suggests that the Canadian dollar may lose further ground in the near-term.” he adds. But he believes the rate cuts and rebounding demand in the U.S. will fuel a Canadian recovery too.

Firmer global demand is also expected to put upward pressure on commodity prices in the second half of the year. “The combination of higher commodity prices and stronger growth will likely support a modest strengthening in the Canadian dollar towards 67 U.S. cents by December.”

The U.S. slowdown and the aggressive rate cuts are likely to weaken the U.S. dollar this year, with the euro, the pound and the Swiss franc all benefiting. “However, the outlook for the Japanese yen is negative, with the currency expected to weaken significantly towards 140 yen to the U.S. dollar this year,” says Alexander.

Japan’s economy is again teetering on the brink of recession, while the corrosive impact of deflation continues and the banking system remains dysfunctional. The weakness in the Japanese yen will limit the depreciation of the U.S. dollar on a trade-weighted basis in 2001.