The near-certainty that the Fed will raise US interest rates once or even twice more this year is a sharp reversal of the sentiment immediately post-Katrina, which was that they might hold, even cut. As well as undermining the housing market, this US interest rate tightening has been at least partly responsible for recent US dollar strength.
However, the gorilla in the room, “the global economic imbalances”, will inevitably impose upon dollar valuations. This was succinctly expressed recently by David Wessel in the Wall Street Journal. “Eventually the US needs to save more as a nation and spend less, particularly on imports that it buys on credit. The rest of the world needs to save less, invest more at home and spend more particularly on US exports. Whatever causes us to save more and to buy less on credit – be it tax hikes, rate increases or a housing-price slump – the global economy will slump, unless Asia and Europe pick up the slack”.
The US dollar is on a knife’s edge and if this recent bout of strength evaporates and the dollar returns to weakness, which we expect, then events could move on very quickly. We don’t doubt that at some point in the future, maybe not that far away, the dollar will be much lower. When a gorilla moves within the confined space of a small room, it very quickly makes its presence felt.
The euro should benefit from future dollar weakness. As the second biggest currency in the world, it can hardly go down if the dollar goes down, for that reason we expect euro-denominated investments to remain safe for sterling investors.
And as we have said before, the one “currency” that really will benefit above all others from dollar weakness is gold!
By RH Asset Management, in the Onassis newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit https://www.rhasset.co.uk/