June 21, 2011 / 1:18 PM / 7 years ago

Dollar to drop in long-term vs. emerging markets

NEW YORK (Reuters) - Investors should prepare their investment portfolios for a weaker U.S. dollar in the next years due to faster economic growth in emerging markets, mutual fund giant OppenheimerFunds said.

A 100 yuan banknote is placed beside a U.S. 100 dollar banknote in this illustrative photograph taken in Taipei June 20, 2010. REUTERS/Nicky Loh

Emerging markets, especially those that are big commodity exporters, have beaten developed world economic growth in the wake of the 2008-2009 financial crisis, thanks to lower debt burdens and healthier banking systems.

China will remain the big consumer of those raw materials as it searches the globe to feed its factories and boost domestic consumption.

“Our long-term position with the dollar is the dollar will lose exchange value, maybe to the commodity countries, countries that are faster growing. Meaning, really the emerging markets,” said Jerry Webman, senior investment officer and chief economist at OppenheimerFunds with $186 billion in assets under management in New York.

Against its major global trading partners, the U.S. dollar is down 5.1 percent year-to-date.

In Latin America, for example, Brazil’s currency has benefited from its strong trade ties with China, high interest rates and portfolio investment flows from foreign investors hunting for better yields. Its currency, the real is up more than 4 percent against the greenback so far this year.

“Those (emerging markets) that are able to engineer this soft landing, keep their economies growing, we think their currencies will appreciate over some years relative to the dollar,” Webman said on the sidelines of the New York Forum.

Central bankers in emerging markets have struggled to contain their currencies from appreciating while not killing off economic activity. They have used a combination of tighter monetary policy and macroprudential measures such as capital controls.

“I don’t know if I want to put a number on (the dollar’s depreciation), but I think it is significant enough that it will affect U.S. consumers’ purchasing power,” said Webman.

“Many investors are going to need to think about having a better match between their investment income and the location of the stuff they are going to want to buy,” he added.

Webman said many investors put their money to work by focusing on geographical regions rather than specific companies or sectors that might perform well no matter the location.

One reason investors are looking into more regional investments is because they are concerned about unsustainable debt levels in places such as the United States.

Washington is struggling to cut public debt. Its latest proposals seek to cut $4 trillion worth of debt over the next 10 years.

“If I am hearing all this terrible political rhetoric here, I want to be investing outside of the U.S.,” Webman said.

U.S. lawmakers are negotiating a raise of the nation’s $14.3 trillion debt ceiling and trying to avoid a default on the country’s bond payments. The exorbitant debt levels have pushed investors to other more contained fixed income markets.

Fitch Ratings warned last week it could slash U.S. credit ratings if the government misses bond payments later in the summer.

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