The dollar has likely begun its long term decline, say investment experts, who add that the risk to America’s investment grade rating could start a stampede away from greenback, devaluing the currency even faster.
The dollar’s recent bottom was on March 4, right around the time of the stock market low, when it hit $1.23 to the euro. It now trades at $1.38 to the euro. It recently peaked at $1.44 on Dec. 17 of last year.
In addition to huge deficits racked up by the Obama administration in the effort to jump start the economy, the global economy is bottoming, and that’s bad news for the dollar, says Thomas Harr, senior foreign exchange strategist for Standard Chartered Bank.
While that argument may seem counterintuitive, the end of the financial crisis means the end of investors’ need for dollars as a safe haven, Harr explained on CNBC.
“We think it’s clearly the beginning of a trend downward for the dollar,” he says.
“The dollar is usually strong during a global recession because of deleveraging and investor repatriation.”
But as the global economy bottoms, “and I think that’s what we’re seeing now, then the dollar will start to fall,” Harr says.
“And it will probably this time fall more first against emerging market currencies, because that’s where fundamentals are stronger” and then gradually against developed market currencies.
“The pace of deceleration of economic data slowing is a negative for the dollar,” Harr says.
“Whether the pace of deceleration is slowing in the U.S., Europe or China, the key thing is that the deleveraging and investor repatriation is not as fast now as it was a couple quarters ago, and that is dollar bearish.”
Harr’s views almost exactly match those of Nobel laureate Paul Krugman’s. He said at a recent seminar, “Just about all of the economic indicators out there are suggesting that the free-fall has come to an end.”
But “the U.S. dollar is going to fall quite a lot,” as safe-haven demand wanes, Krugman says.
Superstar bond fund manager Bill Gross says the U.S. will ultimately lose its triple-A rating, thanks to the exploding budget deficit.
“I think eventually” that will happen, Gross tells Bloomberg TV.
“That’s the trend. It’s certainly nothing that’s going to happen overnight.”
Financial markets reflect that possibility after news that the U.K. may be downgraded, he says.
“The market knows and believes both the U.S. and the U.K. are quite similar in terms of their debt levels and their debt trends.”
What will drive the rating down? The level of outstanding debt as a percentage of GDP, Gross says.
“Interestingly enough, both of these countries start out at relatively low levels” on that score, he explains.
“The U.K. and U.S. are around 50 percent of GDP, where countries such as Japan and Italy are twice that.”
“Why are the U.K. and U.S. potential candidates for downgrades, whereas Japan and Italy are holding up better?” Gross asks.
Answer: “Both the U.K. and U.S. have … deficits of 10 percent (of GDP) annually as far as the eye can see,” he says.
“That means that at some point over the next several years, they may approach 100 percent of GDP (in terms of debt), which is a level at which country downgrades tend to occur.”
Warren Buffett is worried about the U.S. debt buildup too.
“A country that continuously expands its debt as a percentage of GDP, it’s going to inflate its way out of that debt,” he told CNBC.
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