Brown Brothers Harriman: Buy the Dollar, Sell Commodities

Buy the U.S. dollar and sell commodities - that’s the advice from the currency strategy team at Brown Brothers Harriman [BBH]. They say the reversal of a trade that has worked so well for much of 2008 is rooted in the belief that greenback is bottoming.

In a note to clients the firm said:

If the dollar can put in a convincing reversal against the euro, then this may be what lets the air out of the commodity bubble.

They added that the dollar selling “bubble” was simply the other side of the coin of the commodity buying bubble.

Recent commodities corrections from this year’s peaks are only the tip of the iceberg, BBH said, noting the 25% decline for rice and a roughly 5% dip in oil prices. However, both are up nearly 100% since January 2007. These figures support the firm’s view that while fundamental factors like droughts and the demand for ethanol are behind the commodity boom, they are not sufficient to justify huge price gains.

The Chilean peso and the Peruvian Nuevo Sol remain the emerging market currencies that are most vulnerable to a turnaround in commodity markets, while the Norwegian Krone, Australian Dollar and New Zealand Dollar were highlighted as developed nations that are vulnerable.

BBH said:

Given that Asia still has the strongest fundamentals as a region, we believe this recent region-wide sell-off in currencies was overdone, and look for those with good fundamentals to continue gaining in the coming weeks.

Those in Malaysia, Singapore, China and Taiwan are expected to make further gains in coming weeks, while in Indonesia, India, the Philippines and Korea may lag.

Comments

[SWRichmond]

Maybe as a trade, very short term, but someone please show me why. Oil probably has already corrected from its overbought condition. What I'd really like is for someone to lay out the long term bullish fundamentals for USD. I don't know of any.

The bank's association with the Bush family doesn't lend this dollar-bullish call any credibility, either. This is more like a plea than a market call.

[EUARTE]

You act as if the Brasilian Real R$ dosen't exist. It is the strongest currency in South America. How does this effect that currency?

[droskoph]

Here Here. The dollar will asecend because there will be fewer of them in a deflation.

[YR Dog]

On what fundamentals will the dollar get strong? Somehow I do not see a Paul Volker around these days at the Fed. The Fed has abandoned its Mission Statement of support of the national currency and instead is bailing out Wall Street. Sometime, it will have to turn around and support the dollar, but with credit crisis in the fourth inning, I don't think it will be soon

[lorddarley]

<<What I'd really like is for someone to lay out the long term bullish fundamentals for USD. I don't know of any.>>

It's an easy case. Less than 400 million people have rights to a huge and civilized landmass where the legal system protects private property rights. The same continent could accomodate 1.2 billion people without a hard breath.

Growth comes from population increase. It's as inevitable as the tides. The only restriction at present is that existing citizens are fighting a rear guard action to pull up the drawbridge. That Mugwump tactic never succeeds for long.

Look for huge US growth in the next 20 years, fueled by people with names which are hard to spell.

LordDarley

[YR Dog]

On Jun 02 08:13 PM LordDarley wrote:

> <<What I'd really like is for someone to lay out the long term bullish
> fundamentals for USD. I don't know of any.>>
>
> It's an easy case. Less than 400 million people have rights to a
> huge and civilized landmass where the legal system protects private
> property rights. The same continent could accomodate 1.2 billion
> people without a hard breath.
>
> Growth comes from population increase. It's as inevitable as the
> tides. The only restriction at present is that existing citizens
> are fighting a rear guard action to pull up the drawbridge. That
> Mugwump tactic never succeeds for long.
>
> Look for huge US growth in the next 20 years, fueled by people with
> names which are hard to spell.
>
> LordDarley
>
> Come on , they all cannot work at Wal Mart. I really dont see huge growth, more like a long decay of the US Empire as it bankrupts itself and all the bubbles pop. Kind of like deflating the air mattras.