Tags: El-Erian | dollar | European | stocks

El-Erian: Buy Dollars, European Stocks to Capitalize on Dollar's Strength

By    |   Tuesday, 14 April 2015 07:00 AM

After soaring to a 12-year high last month, the U.S. Dollar Index, which measures the greenback against six major currencies, endured a brief correction at the beginning of this month. But now the ascent has resumed.

So how should investors react?

"In positioning for renewed dollar strength, it may be best to resist the temptation of big trades," Mohamed El-Erian, chief economic adviser at Allianz, writes in an article for the Financial Times.

"A superior approach would be to maintain larger cash balances while also exploiting relative price movements and highly differentiated positioning within asset classes."

And what positions should we take?

"That means combining exposures that favor the dollar versus other major currencies (particularly the euro) with hedged European versus U.S. equities positioning and, on the government bond side, U.S. bonds versus German Bunds," he suggests.

"For those retail investors unable to pursue such positioning, their focus would be on accumulating larger cash cushions, providing them with the ability to exploit the high likelihood of market-wide overshoots. After all, we should never forget the growing phenomenon of limited liquidity provision during periods of greater market volatility. And volatility is what awaits markets."

Many experts say European stocks offer more attractive valuations than those in the United States. The S&P 500 index carried a trailing price-earnings ratio of 20.47 Friday, up from 17.61 a year ago, according to Birinyi Associates.

As for bonds, the U.S. 10-year Treasury yield stood at 1.95 percent Monday, compared with 0.15 percent for 10-year German government bonds.

To be sure, while many experts expect the dollar's surge to continue, the currency strategists at HSBC don't. 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 by the dollar index since May 2014.

"This constitutes a significant move, and major rallies tend to have similar life cycles," the strategists 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."

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After soaring to a 12-year high last month, the U.S. Dollar Index, which measures the greenback against six major currencies, endured a brief correction at the beginning of this month. But now the ascent has resumed.
El-Erian, dollar, European, stocks
398
2015-00-14
Tuesday, 14 April 2015 07:00 AM
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