UBS’s managing director of forex strategy Mansoor Mohi-uddin is warning that investors prepare themselves for a strong-dollar world.
That’s because the dollar has been acting differently as of late, rising with signs of economic growth rather than on signs of global weakness.
Thus it’s become less a risk-aversion currency, as we saw during the crisis, and more of a ‘growth currency’ thanks to relative economic strength in the U.S..
Contrary to the trend in the last decade when the dollar only strengthened in periods of risk aversion, that is speculators dumped riskier assets and bought Treasury bonds in times of trouble boosting the dollar, the last year has seen the dollar treated more as a growth currency. With growth prospects so poor in Europe and Japan, investors have favoured developing economies and increasingly the US. The US was the first of the OECD nations out of the recession and is growing the fastest, so far with low inflation.
Remember last year when some were blaming any market move on a fall of the U.S. dollar? Well you can toss that theory in the bin. The dollar has recently gone up with the market as shown by 6-month charts of the Dollar Index and S&P 500 below. This is what Mr. Mohi-uddin is talking about:
He also highlights the return of long-lost U.S. investor demand for U.S. assets, over international ones. This is confirmed by EPFR data discussed here two months ago.
US investors have a staggering $37,000bn of assets under management. According to the latest Federal Reserve and mutual fund data Mohi-uddin says American fund managers have started increasing their exposures to domestic assets within their portfolios. Central banks worldwide manage $8,000bn of reserves. In the International Monetary Fund’s most recent currency composition survey, central banks have raised the share of their reserves held in dollars at the same time as increasing the share held in commodity currencies. As investors have fled Euros and yen they have favoured the dollar. Mohi-uddin believes this is because they see strong growth prospects in the US, but it may also be because the dollar is the least bad of the major currencies out there.
Ie. be prepared for the dollar to continue taking back lost ground. The 5-year dollar index chart is shown below.