By FS Staff
Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman, provides his view on a large range of issues, including his expectation for the dollar to continue higher, the euro to fall below parity, timing of Fed rate hikes, direction of the U.S. economy, currency wars, and much much more. Marc has consistently provided an accurate and valuable assessment of the markets. We highly encourage our listeners to give his remarks thoughtful consideration.
Where do you think we are in the dollar's bull market?
"[I]t looks to me like we are still in the relatively early stages of it and we should anticipate the euro to fall towards its historic lows made in Oct. 2000 at 82.5 cents. And the driving force…is the divergence from the Federal Reserve, which is going to raise interest rates. The market is very confident of a rate hike by this year. The ECB and the Bank of Japan are still easing policy."
How about U.S. economic data? Do you think they'll be forced to hold off for longer given some of the weakness we saw in the first quarter?
"I was one of those people that thought they'd hike in June…now it looks like September, but it does seem clear that the Federal Reserve wants to raise interest rates. The labor market is getting stronger despite the weakness in the March data. This week we had new cyclical lows in the weekly initial jobless claims and we had JOLTS, which is a job opening index that the Fed looks at. And both of those are fairly strong numbers. So I think the market is still going to anticipate a Federal Reserve rate hike, not as a major aggressive tightening cycle like in 1994 and not the very predictable 25 basis point hike at every meeting like Greenspan did in 2004."
So, you don't see the U.S. economy rolling over here into another recession?
"I think that the U.S. economy after another very weak Q1, I think the U.S. economy strengthens. It's an amazing thing too-so I looked at the last five years...Q1 has averaged 0.6% growth. I look at all the other quarters over the last five years-closer to 3% growth. And so I think this year could be turning out to be another year like we've seen: very weak Q1 and then the economy bounces back."
If the U.S. dollar is going to appreciate further, won't this hurt the S&P 500 since a good portion of their sales are earned overseas?
"I think there are a couple misunderstandings here… First thing I would say is that people often confuse our corporate expansion strategy with Germany's or China's. And by that I mean the U.S. does not rely so much on exports to service foreign demand. What U.S. companies do is build locally, sell locally. What that means - and this is something that corporations and a lot of the reporters who cover this do not even think about or talk about - and that is by having this direct-investment strategy of building locally and selling locally, it means that U.S. companies incur local costs. For example, the affiliates of U.S. multi-nationals hire about 5.8 million workers overseas. That wage bill is 450 billion dollars! On top of that, U.S. companies also do research and development overseas - another 50 billion dollars. So, when they talk about their sales, their revenues… you also have [to consider] the costs in those currencies."
There's been a lot of talk about currency wars between various central banks. You are on the front-lines of what's going on in the currency markets-what's your view?
"The best place to see what the central banks are doing is from two places: one is from the [IMF] COFER data...and they give a quarterly report about reserve data and sure enough...it turns out that the dollar's share of reserves actually rose...but what's interesting is the actual number of dollars fell. Why would the absolute number of dollars fall? Because when you have a strong dollar environment some countries intervene to slow their currency's depreciation down. This is one of the reasons why I tend not to buy into this whole currency war type of imagery from the media and some analysts. Central banks do not want their currency falling as fast as they were and so they intervened by selling some treasuries and taking those dollars and selling those dollars to buy their own currencies. It's not a race to the bottom - their currencies were falling too fast."