By Mike Dolan
LONDON Feb 1 For all the frenetic activity in
2013 so far and in the face of a seemingly endless flood of
newly-minted greenbacks, some of the world's biggest investors
are already bracing for a rare U.S. dollar renaissance.
It may emerge by the end of the year.
To look at the 15 percent rise of the dollar against Japan's
yen over in just three months, it's tempting to say the revival
is already underway.
But the truth is that reflects Japan's success in weakening
the yen. The more passive role played by the dollar can be seen
by the latter's simultaneous 5 percent slide against euro.
The dollar's trade-weighted index against the major
world currencies has done very little by contrast, hovering
roughly where it was this time last year and in the middle of
the 10 percent range it has traversed for some four years now.
What asset managers talk about, however, is a sustained
multi-year rebound in the world's dominant reserve currency -
one rooted in growing U.S. energy independence from the shale
gas revolution, improving U.S. trade deficits as a result and
economic outperformance that enables the Federal Reserve to wind
down its currency printing presses before everyone else.
To put this in context, the last comparable move in the
dollar's index was a 40 percent drop from the peak of the
dot.com bubble in early 2000s to the depths of 2008 credit crash
and Lehman bust in 2008. Despite brief stress-related jumps
after that, it's not done much since.
The last big dollar bull market, however, was in the second
half of the 1990s. A combination of higher U.S. returns
following 1994's Treasury yield spike and a structural economic
narrative surrounding the Silicon Valley boom combined to draw
in foreign investors and keep domestic ones at home.
It's the potential re-run of that period that many investors
are keeping an eye on - not for the coming months necessarily,
but more likely over the next couple of years.
"We expect to see a significant re-rating of the dollar in
the second half of this year," said John Stopford, co-head of
fixed income and currency at Investec Asset Management, which
steers more than $100 billion of assets around the world.
"When the dollar gets motoring, it tends to do so in long,
multi-year sweeps of 10 years down, five years up. There are
many structural features building behind this - energy and trade
account improvements and a superior growth outlook - but the
catalyst will likely be Fed policy."
As Investec and others point out, some slowing of the Fed's
bond-buying and quantitative easing is a necessary trigger for a
rise of long-term U.S. interest rates, but there's little sign
of that happening for many months. The central bank's effective
jobless target will now require as much as a 1.4 percentage
point drop from the 7.9 percent unemployment rate recorded in
But Fed policymakers are already mulling the potential risks
of its asset purchases on financial markets and so the debate on
a wind-down of quantitative easing will likely emerge well
before they actually move and be presumably discounted into
market prices accordingly.
And assuming the economic outperformance over Europe and
Japan at least persists, then the sequencing of central bank
policy 'normalisation' would still leave the Fed ahead of the
pack - even if the European Central Bank's untimely balance
sheet shrinkage right now has strengthened the euro in defiance
Ewen Cameron Watt, chief strategist at Blackrock Investment
Institute, the research hub of the world's biggest asset
manager, said exact timing was always impossible to predict but
a major dollar bull market over the next 5 years was likely.
"I can be persuaded with a great deal of certainty that over
the next five years this trend is going to develop even though
it's not going to be a development over the next few months."
Cameron Watt said the best way to look at it overall is
simply the supply of dollars to the world, either through the
Fed printing or via the trade and current account deficits which
effectively push dollars abroad.
The shale and energy story is a secular one but cutting U.S.
energy deficits will reduce the amount of dollars outside the
country just when the Fed's money creation could well be slowing
What's more, the effects of cheaper domestic energy before
the rest of the world emulates the technological development is
having other profound investment effects - such as foreign
companies investing in plants within the United States to either
take part in the drilling or lower their input costs.
French steel tube maker Vallourec, for example, has invested
$650 million in a new plant in Youngstown, Ohio, to take
advantage of the shale gas boom.
As to the fallout from a dollar bull run, a reduction in the
supply of the world's main reserve currency overseas would
likely tighten financial conditions elsewhere, especially for
countries with current account deficits competing for global
investment. And that in itself could reinforce the currency move
for a period.
Although many emerging economies have developed more stable
sources of domestic investment in the interim, it's no
coincidence that the last period of prolonged dollar strength in
the late 1990s came alongside a series of emerging market crises
from Mexico to east Asia to Russia and Brazil.
The fresh burst of volatility on foreign exchanges this year
after a long period of relative calm has certainly forced asset
managers to rethink the currency markets and their implications
- with a plummeting yen, a surging euro, a retreating Swiss
franc and sinking sterling all adding to the mix.
The over-arching theme has been the unwinding of
"safe-haven" trades as the global crisis eases but local
narratives has driven all the moves - renewed Japanese yen
printing; the return to battered euro zone assets and ECB
tightening; or Britain flirting with triple-dip recession and
European Union exit.
"What is remarkable is that for the last three months or so
there really hasn't been a 'dollar story'," said hedge fund
manager Stephen Jen. "The dollar has gone up against some
currencies and down against others. However, I favour the view
that, after the rounds of QE to artificially depress its value,
the U.S. dollar will likely rise rather than fall."