Mansoor Mohi-uddin, managing director of foreign exchange strategy at UBS recently wrote an interesting article in the Financial Times entitled “Beware the impact of a resurgent greenback on other worldwide currencies. The main thrust of the article is that after years of the dollar weakening , and after years of commodities, particularly metals and oil, strengthening when the dollar has weakened, the greenback could be in for a sustained period of relative strength. Contrary to the trend in the last decade when the dollar only strengthened in periods of risk aversion, that is speculators dumped riskier assets and bought Treasury bonds in times of trouble boosting the dollar, the last year has seen the dollar treated more as a growth currency. With growth prospects so poor in Europe and Japan, investors have favored developing economies and increasingly the US. The US was the first of the OECD nations out of the recession and is growing the fastest, so far with low inflation.
US investors have a staggering $37,000bn of assets under management. According to the latest Federal Reserve and mutual fund data Mohi-uddin says American fund managers have started increasing their exposures to domestic assets within their portfolios. Central banks worldwide manage $8,000bn of reserves. In the International Monetary Fund’s most recent currency composition survey, central banks have raised the share of their reserves held in dollars at the same time as increasing the share held in commodity currencies. As investors have fled Euros and yen they have favored the dollar. Mohi-uddin believes this is because they see strong growth prospects in the US, but it may also be because the dollar is the least bad of the major currencies out there. If you don’t want to be in Euros, Yen or Sterling what do you buy Dollars.
In the article’s view the trend is likely to continue, central banks in Japan and Europe, particularly in the UK cannot raise interest rates or they risk damaging the still fragile recovery. Whereas the Fed may soon join the commodity currencies of Australia, Norway, India and so on in raising rates, further supporting a dollar rise. It was only 18 months ago we were being told the dollar’s terminal decline would continue, what a turnaround.