Since the beginning of the year, the U.S. dollar has been the strongest net bought G10 currency, with exception of the commodity-linked ones like the Canadian, Australian and New Zealand dollars. This translates into a mildly higher dollar at a moment when we see general optimism rising and, therefore, the general mood leaning back to “risk on.”
Nevertheless, it must also be said the search for high-yielding debt instruments of emerging markets with their exoticness continues on.
It’s really interesting that we haven’t seen a rising “risk-on” mood or optimism and the U.S. dollar moving together in the same upward direction for more than four years. So, the big question is, if this situation should continue to take hold, what could be some of the fundamental rationale(s).
At least for the time being, nobody puts in doubt U.S. Treasurys remain by far the safe-haven allocation of choice among all Treasurys or sovereigns worldwide. By the way, during recent sessions we have seen a renewed pick-up in the pace of net buying of U.S. Treasurys. On the contrary, the two “big” core eurozone sovereigns, Germany and France, have been out of favor since the beginning of the year.
That said, I would remain extremely prudent of, if not completely abstain from, betting on an imminent substantial rise of U.S. interest rates because we can’t rule out a renewed slowing of the U.S. economy. Of course, I could be wrong,
But for now, we have the imminent threat of what the Bipartisan Policy Center calls the “X Date,” which, in case policymakers in Washington can’t agree in time on raising the debt ceiling, is the first day in which the U.S. Treasury will have exhausted its borrowing authority and no longer will have sufficient funds to pay all of its bills in full and on time.
The Bipartisan Policy Center now expects that “X Date” to be as early as Feb. 15 and as late as March 1. Maybe markets fully expect an agreement on the debt ceiling will be reached just in time and just before that “X Date” cliff, whatever that date could be. Anyway, we won’t have to wait too long before we know if market expectations are right or wrong.
But could the beginning of a firming trend of the dollar confirm what in early December, then-Governor of the Bank of England Mervyn King said in a speech at the Economic Club in New York that 2013 could well be the year where the resurgence of “actively managed exchange rates” takes firm hold in many different places on the globe in order to provide extra stimuli to their respective domestic economies and exports through cheaper currencies. The big question here is, of course, “Cheaper currencies against which currency (-ies)?”
In my opinion, there is not much serious space left besides the U.S. dollar.
Over the weekend, the French Minister of Finance Pierre Moscovici said before leaving for talks with his Chinese counterpart: “An overvalued euro is not in our interest if we wish to be able to reindustrialize the country [France].”
Moscovici fell short of specifying which level of the euro he had in mind. I personally have no doubt whatsoever there is a growing list of eurozone member states, especially peripheral countries and not at least Italy and Spain, that would like to see a substantially weaker euro. Long-term investors should try to keep in mind the eurozone is not and never will be Germany.
And then, there is of course Japan, whose newly elected Prime Minister Shinzo Abe has promised to “do whatever it takes” to re-energize the Japanese economy. This implies that the government wants a substantially weaker yen. Keep in mind Japanese gross domestic product in 2011 was no larger than it was in 1992.
The newly installed government expects a weaker yen would provide its exporters better competitive advantages. Besides that, it also hopes that a weaker yen would logically imply “importing” desperately needed inflation in order to beat its monstrous non-abating deflation problem.
Taking these Japanese policies of weakening its currency into account, I think long-term investors would do well shelving expectations of a further strengthening of the Chinese currency, the yuan, for some time to come. We’ll have to wait and see if the newly installed leadership in China keeps its intensions when it stated exports would not be at the top of their priorities in case Japan would become successful in weakening substantially its currency, strengthening substantially its competiveness.
Yes, for all this and much more, King’s warning in December could be right and 2013 could well become the year of renewed “currency wars” all over again, albeit with different conflict zones, not only because of what Japan has now as priorities on its “to-accomplish” list.
In case Japan, but also other global players succeed in lowering their respective exchange rates, the U.S. dollar should become, willing or not, once again, one of the better currencies to have in your portfolio. Leave the exotic currencies to their “aficionados” or “fans.”
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