The dollar will be one of the best safe-haven investments in the next few years as other regions devalue their currencies to promote economic growth.
The U.S. economy is expected to expand by 2.2 percent in 2014 and about 3 percent in 2015 and 2016, according to the Organization for Economic Co-operation and Development, while other countries struggle to keep up.
The eurozone is expected to grow 0.8 percent in 2014, 1.1 percent in 2015 and 1.7 percent in 2016. China’s growth is expected to slow from 14.2 percent in 2007 to roughly 7 percent in 2015-2016.
Japan unexpectedly went back into recession in the second quarter, contracting by a 1.6 percent annual rate.
Economic difficulties are pressuring countries such as Japan to devalue their currencies in an effort to remain competitive. Meanwhile, the Federal Reserve may head in the opposite direction by strengthening the value of the dollar with an interest-rate hike next year.
U.S. Treasury Secretary Jacob Lew this month warned that the global economy cannot show an over-reliance on the U.S. for growth.
“The world cannot afford a European lost decade. The world is counting on the U.S. economy to drive the global recovery,” he said in a speech before the World Affairs Council in Seattle. “But the global economy cannot prosper broadly relying on the United States to be the importer of first and last resort, nor can it rely on the United States to grow fast enough to make up for weak growth in major world economies. Market-determined, flexible exchange rates are an important source of resilience in the global economy."
With the growing divergences among the U.S. and other regions, the minutes of the October meeting of the Federal Open Market Committee this week may provide some insight into the direction of the dollar.
In the September minutes, Fed members expressed clear concerns about damage a too strong dollar could cause to the U.S. economy. It remains to be seen if the Fed would even try to intervene in some way if the dollar’s appreciation accelerates too quickly.
That’s not an immediate worry, which doesn’t mean it will be postponed forever. The euro remains above its relatively short lifetime average of $1.23 per euro.
The Japanese yen’s post-1990 average stands at 135 yen per dollar. Meanwhile, the U.K. pound is slightly below its long-term average of $1.65 to $1.66 dollar per pound.
Investors should not expect we are in for a smooth ride for the U.S. dollar. Any volatility spikes won’t occur in one single move. More likely, they will be repeated many times before calming down again.
The dollar will be still one of the best and most liquid safe havens in the foreseeable future, which doesn't mean forever. My preference is to accumulate dollars at moments of temporary weakness.
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