Dollar Doldrums Will Soon Be History - Barron's 14 comments
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Barron's says the U.S. dollar could gain 15% vs. the euro over the next year.
How so?
While the Fed is more-or-less at the end of its rate-cutting cycle, European central banks are still on the precipice of their credit crisis. As the spread in interest rates begins to narrow -- and as fickle investor sentiment makes an abrupt about face -- the dollar should rise, it says. Commodity stocks and overseas earners like Mosaic (MOS) and Halliburton (HAL) will likely fall as commodities prices fall and foreign earnings become less lucrative. Other stocks with much to lose from a rebounding dollar include Apache (APA), Freeport-McMoran (FCX), Southern Copper (PCU) and Bunge (BG).
"Negatives about the dollar are more fully discounted compared to the potential positives," Brown Brothers Harriman's Marc Chandler says. 50% of global money managers said in an April survey the dollar is undervalued, while an amazing 71% think the euro has overshot.
Things could still get worse in the short-term, but Barclay's David Woo says one of three things could rekindle the dollar: a commodities crash; a major drop in U.S. stock markets that leads to a global economic slowdown; or a continued rise in long-term interest rates even as the Fed keeps short-term rates low.
Despite concerns about the dollar losing its coveted "global currency" status, the IMF noted that dollar reserves were steady at 64% even after its recent plunge, suggesting central banks are in no rush to dump the dollar.
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Barron's has been unwavering in its case for lower commodity prices.
Here's a sampling of some pretty diverse opinions about the dollar and where it's headed:
- Kathy Lien thinks the amount of reserves held in euros will rival dollar reserves within the next 10 years.
- Michael Shedlock agrees with Barron's: He anticipates a dollar bounce, but notes traders will have to be flexible.
- Blogger Seven Days Ahead thinks there's no stopping the euro.
- Robert Tabloid thinks we've got it all wrong: All fiat currencies will continue to go down in terms of buying power.
- Bespoke refrains from making any forecast, but takes a hard look what investors can expect in commodities and oil if the dollar were to actually start going up.
Note Seeking Alpha's super-useful Currency ETFs and ETNs and Commodity ETFs and ETNs selectors.
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This article has 14 comments:
More and more, sovereign countries will demand hard assets, like precious metals, or some form of non-depreciable store of value like even oil, in exchange of goods purchased and services rendered.
Let's take oil. So i am an oil company. The price of oil goes up (supposedly driven speculators, who are of course directly related to the devil), but there is no actual increase in demand.
So why would I pay a company like Halliburton billons of dollars to increase my production? Doesn't add up, does it?
I don't know where the dollar is heading. I just know, that it is more likely, that dollar is more of a commodity play, than commodities are a dollar play.
P.S: The Euro is overvalued against the USD.
Thx jegan
First, commodities. If commodities prices are all driven by speculation, one would see extreme contango in the spot market and 2 front-month contracts. Speculators do not want, and do not in most cases have the ability, to take physical delivery, so their only choice is to close out positions before expiration. If the price increases are caused primarily by long speculation, one would expect to see prices fall dramatically as contracts expire and speculators are forced to roll over their positions. Despite the overblown worries about lower-than-normal convergence, this is not happening. So unless stockpiles are rising rapidly as speculators are forced to accumulate assets they cannot use, the higher prices are being caused mainly by real supply and demand factors. In many markets stockpiles are at or near all-time lows, so if you want to assert that speculation is the main driver of today's prices you are effectively making a conspiracy theory argument; after all, all that metal, oil, and food that speculators bought up has to be stored somewhere (or destroyed by the people who paid for it), and it isn't in any of the places we'd normally know to look. The logic is simply too tenuous at this point, so I think it's safe to say commodities are expensive mainly because supply is tight and demand is strong.
As for the dollar, the opposite is true. Supply is abundant, especially of dollar-denominated debt. America at all levels consumes vastly more than it produces, and this is reflected in the rapid growth in its money supply and in Treasuries outstanding. There is no sign that Americans intend to reverse this multi-decade trend, even as foreign central banks talk openly about holding fewer dollars in the future. While you correctly note that there has been no panic selling, it does seem safe to say that the rate at which foreigners accumulate Treasuries will decline in the future. It doesn't take a genius to see that interest rates will have to rise just to keep the dollar near its current strength and, indeed, this is already happening. If the Fed doesn't follow up by curbing the supply of short-term money, we could only expect higher price-inflation and a weaker dollar. I agree that the euro looks overvalued right now, but the idea that the ECB will cut rates soon seems unsubstantiated. If anything, Europe is looking a bit stagflationary right now as growth falls and inflation rises. The ECB surely knows that the way to beat stagflation is to raise interest rates, triggering a recession but also resetting inflation expectations. At worst one might assume they will try to hold steady and hope inflationary pressures abate on their own. Given the ECB's history, anyone hoping for a rate cut there is whistling in the dark. No matter what happens in Europe, Asia is already saturated with dollars and continues to run large trade surpluses with America. The only way they can limit further appreciation in their own currencies is by buying more American companies. There is a limit to how well this will be tolerated and to how many companies in a weak, stagnant economy can provide the returns these SWFs will be looking for. So I can only expect the dollar to continue its decline against the RMB.
As the population continues to age and older, better-educated, more productive workers retire on state-funded and other pensions and are replaced mainly by poorly-educated immigrants, taxes and borrowing will spike as productivity tanks. This will surely happen in Europe as well as America, and indeed it will to an extent be a global problem. But the pattern continues to favour countries with younger but steady populations and strong investment in human capital and infrastructure. None of that describes America.
In short, there is no good reason to think the dollar will rise significantly from here, barring a dramatic change in America's collective values and expectations. A dead-cat bounce seems a given, but only a sustained period of higher productivity, higher savings and investment, higher exports, higher taxes, and reduced consumption, credit creation, and government borrowing could see the dollar back to 90 on the index. From my view here in the trenches, Americans simply haven't the fortitude to do it, and in any case demographics and underinvestment are going to devastate this country. 3 years out, 60 is more likely than 80. Well beyond that, history suggests that the dollar has an inescapable date with destiny at zero. Expect most if not all other fiat currencies to join it there sooner or later.
There is blood bath in property valuation, Germany industrial production is suffering acutely, Euro rates sooern rather than later will have to be cut.
Also it is an illusion to believe a housing bubble bursting can be reverted by cutting rates. See what has happened in the US, the mortgage rates sit at the almost the same level, if not higher, after 300bps cut in the Fed funds.
Your article has done nothing more than add to the confusion that already exists around the world.
The idea that sovereigns are selling dollars is misleading and lacks evidence. The IMF is the most authoritative source and its figures show central banks hold more dollars than ever before. They also hold more euros. It is not a zero-sum exercise.
The rally in commodity prices may perhaps be some function of a weak dollar, but as the greenback rebounded, oil for example did not push back. Surely we would all agree that the rally in commodity prices cannot all be attributed to a weak US dollar, like the price of rice doubling.
The US dollar has been declining for years. The bad news has been fully discounted.
It seems to me that while there are many ways to lose money (and I have found severalof these myself) there are only three ways to make money: carry trades--out of favor and net long spec yen positions at the IMM are near there highest levels in a decade--momentum trades, buy when it is going up and sell when it is going do--is more a strategy for short term speculative types. Medium and long terms investors should be looking, imho, at mean reversion trades--with the mean being PPP (or some derivative) in the fx market. Using the OCED measure of PPP, the European currencies have not been this rich --relative to PPP or value--.
IMHO, market participants often exaggerate structural factors and under-appreciate cyclical factors. The negativity to the USD reminds me of the late 90s early 2000 when taxi cab drivers would give me internet stock picks as they drove me to Wall Street.
Good luck.
When this happens, look for the dollar to drop. Several serious proposals are in the works for this very change.
There will be less of a reason for foreign governments to hold dollars. This will increase dollar supply, as foreign central banks hold fewer dollars as a percent of overall reserves, and these dollars will be turned into other currencies, or commodities.
Currently, over half of the dollars in existence in the world today are held overseas, much of it for reserve currency purposes. Some of these dollars are coming back to the US in a tsunami called inflation.
The biggest bubble in the world today is not real estate, it is US treasuries. Global dollar surpluses have sought out the "safety trade" of treasuries as a way to find port in the storm from recent increases in market volatility.
Look for inflation to increase, yields to rise, and bonds to fall.
Those treasuries, prices in dollars, will be converted into other assets--including commodities, and currencies. As foreign governments hold a huge chunk of treasuries, they will continue to diversify away from US bills and bonds to protect their capital. This is already occurring.
The "flight to safety" bond trade will come to an end, and be replaced by the "inflation trade". This is already occurring.
Its not that the Europeans, or Chinese, or Brazilians have a stronger economy--(although that helps)--it is far more important that the dollar's role as the world reserve currency is declining, relatively speaking.
The inevitable decline of US dollar hegemony will take place over a decade or two. Your protection is be long commodities, long high quality dividend paying foreign equities, and short treasuries.
"Despite concerns about the dollar losing its coveted "global currency" status, the IMF noted that dollar reserves were steady at 64% even after its recent plunge, suggesting central banks are in no rush to dump the dollar."
I would like to point out that the reason for this is the "flight to safety trade" and the fact that the market has been looking for a port in the storm. When the worlds investors wake up to the real inflation rate much north of 4%, treasuries will not look so appealing.
Currently, 10 year bond holders get 3.86% to guarantee liquidity, and the loss of purchasing power over the next decade. Investors typically overpay for liquidity, and stability--and this is one example.
Moreover, the 64% figure is actually a substantial decline in relative reserve percentage over the last decade. Look for this long term trend to continue--reserve banks holding lower and lower percentage of us dollar as reserves, as percentage of overall reserves.
Its not necessary for banks to stop buying us bonds and bills, they merely need to slow the purchase of these assets--and this is what we have seen over the last decade. The bullish case for the dollar is short to medium term--the long term trend is still down.