Tags: dollar | bull | recovery | yen

FT: US Dollar Bull Market Is Knocking at the Door

By John Morgan   |   Friday, 15 Mar 2013 07:55 AM

Conditions are ripe for a “major bull run” in the U.S. dollar because the United States is in better economic shape than the rest of the developed world, according to the Financial Times.

The Times listed a variety of factors for its rosy scenario, including more foreign investors who want to own U.S. assets and favorable bond yields compared with other major nations.

“We are getting back to a traditional cycle where the U.S. is at the forefront of a recovery,” Alan Ruskin, head of currency strategy at Deutsche Bank, told the Times.

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On a trade-weighted basis, the dollar has jumped 4.5 percent higher over the past five weeks, gaining in tandem with stock prices, while the euro, British pound and Japanese yen have all dropped.

Historically, the last two periods of significant dollar strength — in the early 1980s and again in the mid-1990s — both started with a cheap dollar balanced against an improving economy and rising interest rates. Today may contain similar conditions, even as the dollar sits about one-third below is 2001 peak.

“The fact the dollar index is moving higher with risk assets illustrates that the market is pricing in a new phase of the US dollar rallying on strong data, ultimately facilitating a move to higher yields as the [Federal Reserve] becomes more confident that the lags in policy have effectively already delivered ‘escape velocity,’” Richard Gilhooly, strategist at TD Securities, told the Times.

The newspaper said long-term dollar bulls cited the fact the United States is moving toward energy independence is also a big support for the U.S. currency.

“The shale revolution looks like being a positive supply shock for the U.S. dollar,” Nicholas Pifer, portfolio manager at Columbia Management. “From a foreign perspective, dollar assets become more attractive.”

The Times cited a potential fly in the robust dollar ointment, however.

Tad Rivelle, chief investment officer of fixed income at TCW, predicted the dollar will sink because the Federal Reserve’s quantitative easing (QE) monetary policy will fail to spark a sustained recovery.

“The more likely scenario is a stagflationary outcome and I’m not a fan of the dollar longer term,” Rivelle said.

But FX Empire reported the eventual end of QE could instead be another support for the dollar.

“A recovery in the U.S. economy may signal an end to the Fed’s bond buying program and cause it to turn off the printing presses which have weakened its currency,” FX Empire said.

The World Gold Council said that “while the dollar is still the primary global currency, its long-term dominance is less certain.”

As a result, central banks have been lowering their dollar holdings while increasing purchases of such assets as gold, the yen and new alternatives such as Chinese renminbi, the World Gold Council said. It reported the share of "other" currencies rather than the U.S. dollar held in reserve at central banks has tripled in absolute terms since 2008.

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