Tags: HSBC | dollar | asset | bubble

HSBC: Dollar Rally Will End Just Like All Asset Bubbles

By    |   Tuesday, 14 April 2015 06:00 AM

Many experts say the dollar's ascent that took it to multi-year highs recently has a lot further to go.

The dollar hit a 12-year peak against the euro last month, and many forecasts call for the euro to drop below parity with the dollar.

But the currency strategists at HSBC see it differently. In a report obtained by MarketWatch, they classify the dollar's surge as a mini version of an asset bubble.

The strategists focus on the 25 percent jump in the U.S. Dollar Index, which measures the greenback against six major currencies, since May 2014.

"This constitutes a significant move, and major rallies tend to have similar life cycles," the strategist write. "In fact, such life cycles tend to follow the typical phases of classic asset-price bubbles, just on a smaller scale."

The strategists describe four phases of a bubble: new discovery, early rise, the pace picks up and the subsequent fall. They view the dollar as in phase three, where the rally's speed accelerates until it becomes "divorced from reality." That sparks a consensus that "this time it's different, potentially leading to a final surge higher."

"The party is nearly over, it's time to gather your belongings and get out while you can," HSBC warns.

Meanwhile, the dollar's upward surge has thrown a wrench into the Federal Reserve's planning for interest rate hikes.

"If the dollar goes higher, the Fed is not likely to raise rates," star investor Jeffrey Gundlach, CEO of DoubleLine Capital, said in a call with investors last week, Think Advisor reports.

The minutes of the Fed's March policy meeting noted that some policymakers "anticipated that the effects of energy price declines and the dollar's appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year [after June.]"

Gundlach's take: "Clearly the Fed is cognizant of the strong dollar."

The dollar's ascent curbs exports by making them more expensive in foreign currencies and hurts U.S. corporate earnings by making their foreign revenue worth less in dollar terms. It limits inflation by making our imports cheaper in dollar terms.

"The dollar's rise has to have consequences," Gundlach noted.

Many economists expect the Fed to raise rates in September. It has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.

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Many experts say the dollar's ascent that took it to multi-year highs recently has a lot further to go.
HSBC, dollar, asset, bubble
Tuesday, 14 April 2015 06:00 AM
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