We find ourselves in good company in not believing that the dollar will return to strength. Recently Robert Rubin, the longest ever serving Treasury Secretary under Bill Clinton, said “Foreign investors probably wont keep increasing dollar holdings raising the risk of a slump in the US currency. Failure by the US government to shrink its budget deficit may spook the Central Banks, hedge funds and others who have been buying Treasuries.”
Another giant of the economic world is former Fed Chairman Paul Volcker. His action as Fed Chairman at the start of Regan’s presidency was to inflict the necessary pain to the system by sharply increasing interest rates to reverse the inflationary nightmare. Recently he said “The US borrowing requirement raises the risk of a crisis in the dollar as soon as the next two and a half years.”
There is much speculation that Central Banks might choose to invest less in the US, a point recently made in a recent speech by Janet Yellen, President of the San Francisco Fed. Zhou Xiaochuan, Governor of the Peoples’ Bank of China, confirmed that sentiment when he said that their Central Bank had a clear plan to diversify reserves.
Fortnight by fortnight we report upon dollar action, most of which is generated by short-term traders responding ahead of, and immediately following, important but constantly varying data. Their fluctuating views on such issues as the Fed’s future interest rate policies cause them to buy and sell the dollar. Robert Rubin and Paul Volcker are ignoring all of that noise and cutting to the chase. Their view, and one we share, is that the fundamentals are irrefutable and a weaker dollar should be the consequence. The recent strength of gold bullion may be a market signal suggesting that the next big negative moment for the dollar is close to hand.
For about a two year period the US dollar has vacillated within a range. Ranges that go on for a long time invariably end with a decisive signal. It is always important to remember that, particularly when that signal is contrary to one’s view. If it is a move to the upside, above 99.0, we will believe it. But what we expect is a move to the downside below 88.0.
The most obvious beneficiaries of future dollar weakness are gold and the second most important currency in the world, the euro. Each should enjoy a share of the spoils if future diversification away from the dollar takes place.
By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit https://www.rhasset.co.uk/