Tags: g7 | uk | fed | investors

US Dollar's Fate as Safe Haven Hinges on Global Crises

US Dollar's Fate as Safe Haven Hinges on Global Crises

By
Friday, 20 May 2016 07:31 AM Current | Bio | Archive

Those hardworking servants of the public, the G7 finance ministers, are meeting for a well-deserved taxpayer’s financed weekend mini-break in Sendai, Japan.

Their meeting is not likely to produce anything other than platitudes and the general sense of contentment that comes from lounging around the hot springs of the resort over there.

Anyway, so far we’ve learned the G7 participants have agreed that instead of relying on short-term fiscal stimulus or monetary policy, structural reforms combined with appropriate investment are solutions to achieving sustainable growth, which confirms there will be no coordinated fiscal action.

It’s also a fact, the G7 finance ministers have widely differing powers. The U.S. Treasury Secretary really has very little control over fiscal policy in comparison to the UK Chancellor for example. The Euro area has its own fiscal rules that have to be obeyed by its 19 members’ governments, at least in theory if not in practice, and so forth…

A G7 source commented on the UK referendum, which has been attracting international attention, including from the Federal Reserve this week: “A Brexit could, in the short-term, lead to turbulence in financial markets.”

Yes, a Brexit wouldn’t be helpful for the markets, but the latest telephone opinion poll in the UK showed 55 percent in favor of remaining in the EU against 37 percent in favor of leaving, but please take care, that result was the consequence of what is called a squeeze question asking the bias of those who reported themselves initially to be undecided. In other words, the apathetic majority as reported in this opinion poll appears to be tilting in favor of remaining in the EU. 

Now, if this is reflected in the coming polls ahead of the vote, then this will mean that the turnout is going to be very important as a higher turnout under such circumstances would make the opinions of the apathetic majority more significant.

All that said, and after the release of the latest FOMC minutes, the rather sudden story of excitement about the prospect of a June or a July rate increase has already achieved one important fact. Which is that it has helped the markets to break out of their disinflation, deflation mindset and has made them focus on the reality that inflation has been stronger than they apparently have been taking into account.

For long-term investors it should be clear that it doesn’t matter if the Fed moves in June, or in July or even in September.

Talking about September we should keep in mind the Fed will then have more evidence of the growth acceleration while the first quarter GDP growth number may well have been revised up (normally growth data in the States are revised up) and a better second quarter should also be visible in the figures.

Once the Fed raises the Fed funds rate we could expect that overall interest rates should move somewhat, no, not that much higher, which should, for example, widen the interest rates differentials between U.S. and the Euro area.

It might be helpful to recall, especially for long-term investors, the idea that interest rates differentials drive currencies is deceptively simple, and in practice, most deceptively simple ideas don’t really follow through convincingly well.

For currencies there are many other forces that are at work on a global scale and never forget there are some structural tectonic plate tight movements with regards to the relative importance of the current accounts and shifts in foreign exchange reserves, to name only these important ones but that are not the only ones.

This means that the dollar becoming that much stronger because of Fed starts normalizing its rates is not to be expected, at least that’s how I think about it, which does not mean the strong dollar story will be replaced by a weak dollar story, but the dollar could probably show more some kind of an absence of sudden strengthening movements.

All this of course implies we don’t have a sudden/unexpected serious geopolitical event that would put the dollar back in its role of first safe haven currency in the world. Let’s hope that doesn’t occur.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

© 2019 Newsmax Finance. All rights reserved.

   
1Like our page
2Share
HansParisis
All this of course implies we don’t have a sudden/unexpected serious geopolitical event that would put the dollar back in its role of first safe haven currency in the world. Let’s hope that doesn’t occur.
g7, uk, fed, investors
720
2016-31-20
Friday, 20 May 2016 07:31 AM
Newsmax Media, Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved