Sometimes we just have to agree to disagree.
But it seems the currency markets can’t even manage that. According to a report on Bloomberg this morning, markets are in a right tizz over the dollar. Some say it is set to crash, others say it is set to soar. The only thing they seem to agree on is that it is set to do something.
Mind you, if you were to take the average view, it seems the most likely course for the dollar is a straight line. But, if we look beyond the short-term uncertainty, we can see a much clearer view of the longer term, not just for the dollar, but sterling too.
On the one hand, you have those who fear all this US government borrowing will lead to a crash in Uncle’s Sam’s fortunes.
The Chinese seem to lead this camp, and lately the whisper of disquiet from the Chinese on US spending has turned into a roar.
Then, as the BRIC countries debate moving away from dollar reliance, it becomes clear that it is only a matter of time before the dollar is just one of several international major currencies.
The Chinese are in a difficult spot. Their holdings of dollars are such that if the greenback did indeed fall, the Chinese state would be left nursing heavy losses – very heavy losses. So on the one hand they want to reduce reliance on the greenback, but on the other hand they are terrified that if they start selling, the dollar will crash.
The Chinese authorities talk about lack of morality behind Anglo-Saxon borrowing, and yet they need Anglo-Saxon borrowing in order to maintain their growth.
So that’s one tricky area.
Then there’s green shoots. Lately, the focus on gloom has shifted to Europe. It is clear that the problems of emerging Europe could yet strangle any hint of recovery from the rest of Europe. As it is, Germany seems to be on course for a 6 per cent contraction this year.
According to Bloomberg, some analysts are predicting sharp rises in the dollar relative to the euro – Redtower Asset Management, for example, has called a rise in the dollar–euro exchange rate from 1.39 dollars to the euro, to 1.16 by the year’s end. On the other hand, Standard Chartered Plc sees the exchange rate falling to $1.55.
Bob Diamond, at Barclays, recently said: “Currency volatility is running at more than double the norm.”
It is making planning a nightmare, of course. Businesses like stability, they like to know what things will cost in six months’ time.
In the long term, however, we will see another issue coming to the fore. As the retirement of the baby boomers becomes an issue no one can avoid, it seems savings rates in the West will rise. In Japan, where this issue is more advanced, this meant zero interest rates, and a cheap yen. It is difficult to call how the dollar, euro and pound will change relative to each other.
But it does seem that in the longer term, as savers grapple with their approaching retirement, they will demand higher returns on their money. This will surely mean money flowing from developed world to developing world – which in turn will push up the value of currencies from the BRIC countries.
We are set to enter the era of the yuan, ruble, rupee and real.
© Investment & Business News 2013