Tags: dollar | bullish | long | term

Long-Term Outlook for the Dollar Is Bullish

Tuesday, 18 December 2012 10:16 AM Current | Bio | Archive

It’s normal to see overall optimism in the markets this time of the year. Nevertheless, as a long-term investor, certainly not as a trader, I try to remain very cautious before deciding to invest and I certainly do not take it for a sure thing we’ll have a solid recovery taking hold in the United States in the coming one to two years.

In my opinion, it’s always important to act only when markets’ patterns become clear and are firmly based on fundamentals than on temporary dreams.

In fact, when the Federal Open Market Committee last week stated it would keep the target range for the federal funds rate at 0 to 0.25 percent as long as the unemployment rate remains above 6.5 percent, my opinion is that it simply announced a solid recovery, which implies substantial lower unemployment rates, could be still a few years away. Even when Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, says it could take as long as three years for the U.S. unemployment rate to fall to 6.5 percent, I still consider this as a mildly optimistic view.

We cannot overlook the fact the U.S. Bureau of Labor Statistics says there are about 6.9 million people to be considered as out of the labor force but who still want a job. The big unknown here is which part of these workers will stay out forever or will enter the labor force as the U.S. economy (slowly) recovers.

In case 33 to 40 percent of these workers join the labor force, which is the historical reference, once the economy is clearly improving, this by itself would have a major impact on slowing the decrease of the unemployment rate in the coming years. You shouldn’t be surprised to see the U.S. unemployment rate remaining in 2013 somewhere around where it stands now despite real, but still not strong enough, job growth.

That said, the Fed’s continued accommodation is apparently not without costs, as already the forward five-year inflation expectations moved above 2.5 percent, which suggests upside risk to long-run inflation, but that's a problem for later. For now at least, risks appear balanced between high levels of liquidity, slow growth and limited near- to medium-term inflationary pressures.

And then there is of course the question if the policymakers in Washington will reach a deal before the fiscal cliff situation becomes reality. But, take care, if there is a "bad" deal fabricated in Washington we should not exclude downgrade(s) of the United States by one or more rating agencies in 2013. Yes, as a long-term investor I would prefer to watch and wait until there is more clarity.

But it's not all worrisome news. Notwithstanding the most immediate problems still don’t have a good solution yet, I want to reiterate that I still remain positive on the dollar in the longer term, regardless of the final outcome of the ongoing U.S. fiscal negotiations and fiscal austerity that will temper U.S. growth next year. I don’t deny the dollar faces problems, as in fact do all currencies in the world.

Maybe it could be enlightening to take notice the dollar index closed Monday at 79.58, up 4.7 percent from 76 where it was in January 2008 on the onset of the global recession. No, we haven’t seen the dollar collapsing as was, and still is, broadly feared. Notwithstanding the Federal Reserve’s continued accommodation policies, the Fed's policy now seems to not be causing the dollar-negative impact in the same way as it did in the past.

It’s also extremely important as a long-term investor to take notice that China’s era of substantial foreign exchange reserves growth is definitively over and, because of that, its currency reserves diversifications, which had a positive impact on the euro and a weakening impact on the dollar.

Looking at industrial production of the big economic world powers this might come as surprise, but since the start of 2010 the United States is up 12 percent, while the eurozone is up 2.4 percent. In sharp contrast, China is down 2 percent and Japan is down 6 percent.

Maybe the most important positive game changer for the dollar is the fact that the U.S. oil industry has undergone a spectacular turnaround during the past five years.

U.S. oil output has increased 21 percent over that period after having fallen an uninterrupted 25 percent since 1985. For this year, U.S. output of crude is expected to rise 7 percent, with an average output of about 10.9 million barrels per day, which would be the biggest yearly gain since 1951. As growth is set to continue, there is a high probability U.S. oil output could exceed that of Saudi Arabia by 2017.

The ongoing boom in oil and shale gas production has and will continue to have further positive impact on the U.S. economy as a whole. No doubt about that. By the way, natural gas now sells for about a quarter of the price it sold for at its peak in 2008, and we could even see the United States becoming a net exporter of liquefied natural gas in the relatively short to medium term. Cheaper energy for the American industry and consumer who pay in dollars in the future will have a positive impact on U.S. consumption as well as on U.S. manufacturing.

Please don’t take me wrong. No, I don’t expect the dollar to go up in a straight line. As I see it, it will have its normal ups and downs, but the longer-term outlook should turn bullish. As a long-term investor I would try to accumulate the dollar on dips. Of course, that’s easier said than done.

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It’s normal to see overall optimism in the markets this time of the year. Nevertheless, as a long-term investor, I try to remain very cautious before deciding to invest and I certainly do not take it for a sure thing we’ll have a solid recovery taking hold in the United States in the next few years.
Tuesday, 18 December 2012 10:16 AM
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