A fistful of dollars

WHAT YOU NEED TO KNOW

 

• We expect the US dollar to weaken gradually from here, as we project the supply of USD to exceed demand


• Long-term valuation, economic and oil price recovery, Federal Reserve policy and the US twin deficits are all USD-negative


• Rising trade tensions are a key risk to this investment call but, to derail it, they will have to escalate meaningfully


 

 

BID FOR SAFE-HAVEN CURRENCIES SET TO LESSEN

The old adage goes that if you ask 10 economists their views on something you get 11 different answers. But there is one topic on which nearly all economists seem to agree: there’s an apparent disconnect between the “despair” phase of sharp economic contraction, which may now be easing slightly, and financial markets already expecting a robust phase of economic “repair”.

We propose a Counterpoint and believe that the apparent disconnect can be explained and should not unduly worry investors. Financial markets lead the economy and are influenced more by the coming change to growth than the current level of growth. So, for financial markets, the improvement in economic data, even if from a very weak starting point, is more important than the current depressed level of economic activity.

This has key implications for currencies. As the economy moves from “despair” to “repair”, the bid for safe-haven currencies is likely to lessen. We do not expect to see significant US dollar weakness overnight and against all currencies simultaneously. However, the U-shaped recovery that we envisage could eventually ease the risk-aversion component that has supported appetite for US dollars.
 

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