A puzzle is “preoccupying the world’s currency dealing rooms”, says John Authers on Bloomberg. The global economy is beset by tariff wars and political instability, yet we are living through “unusually low foreign-exchange volatility”. The US dollar has not had a weekly swing of more than 2% against other developed-market currencies for two years. The last time this happened was in the mid-1970s. A market truism is that “financial stability generates instability”. This period of curious tranquillity might “portend a new long-term trend”: the arrival of a weaker US dollar.
The end of the trend
High-yielding American bonds and “modish technology stocks” have made dollar assets the “go-to place for global savers” in recent years, says Buttonwood in The Economist. The world’s reserve currency has been riding high relative to others since 2015. Yet the “scales are tilting”. Talk of a “synchronised” pick-up in global growth next year should prompt investors to move money out of expensive US assets to places where stocks and bonds are cheaper, particularly in emerging markets. The dollar’s “stint at the top of the currency pile is looking tired”.
The stars are aligning for a weaker dollar, agrees Louis-Vincent Gave of Gavekal Research. The Federal Reserve is back in easing mode. A US-China trade truce could stoke risk appetite and encourage investors to venture out of dollar assets. In America, the bursting of the start-up “unicorn bubble” and talk of a left-wing Democratic presidential candidate are also bearish for the greenback. A weaker dollar would be good news for the world economy. It would mean cheaper financing costs for companies in emerging markets. It would also help US exporters and boost corporate earnings.
Time to take out insurance
There are more alarming reasons to believe that a weaker dollar is coming, says John Mauldin in his Thoughts From The Frontline newsletter. The US federal deficit recently rose above $1trn for the first time since 2013, and that doesn’t include America’s mountain of unfunded pension liabilities. At this rate, “we will spend the latter part of the 2020s going through a kind of worldwide bankruptcy” that Mauldin calls “the Great Reset”. Politicians will never raise taxes or cut spending enough to close the gap, so the Federal Reserve is likely to find a convenient excuse to fire up the printing presses in a process known as “debt monetisation”. That could rapidly undermine confidence in the global dollar-based currency regime. “Consider slowly increasing your allocation to physical gold.” Don’t think of it as an investment so much as “central bank insurance”.
“De-dollarisation” is already afoot, says Rana Foroohar in the Financial Times. China is doing more business in euros and recently issued euro-denominated bonds. Deglobalisation is upon us and history shows that “asset-price collapses” in the country associated with the “old order” usually follow. “No wonder gold bugs abound.” (See page 14.)