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Is the US Dollar’s rise a safe bet?

Few investors would currently bet against the US dollar continuing to rise. Economic growth is outstripping most other developed countries, the Fed might finally be able to raise interest rates next year and America’s current account deficit is shrinking fast.

All this as European and Japanese growth stalls. Their central banks favour a high dollar to assist their own recovery.

As JPMorgan Asset Management write in the Financial Times, history shows that major currency trends usually last once established so there’s no reason to expect the greenback to level off anytime soon.

Whilst this may harm US equity returns, it should indeed lead to stronger corporate profits in Europe. Evidence also suggests emerging markets might withstand this latest period of dollar strength better than before.

There is still a danger that the dollar’s strength could lead to a dangerous imbalance amongst the world’s biggest economies. But, as the FT story concludes, “the last time the US dollar rose sharply and the oil price collapsed it was the start of the great recession. The prospect of unbalanced global growth over the next year or so is a lot more attractive than no growth at all”.

There is also a good video from the FT explaining some of these trends see below.

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All quiet on the markets front

 

In these ‘shaky isles’ we know all too well how volatile the world is beneath our feet. After earthquakes and volcanic eruptions we naturally become desperate for a period of calm.
But volatility in global markets is not necessarily such a bad thing. It demands discipline in investment decisions and wards off the threat of complacency that has the potential to leave companies and whole economies vulnerable to future seismic shifts.

 

The prolonged period of stability currently being seen across all asset classes is the focus of recent analysis by the Financial Times. It points to the ‘extraordinary control’ of central banks following the 2007 crisis which, while successful in avoiding catastrophe, has led to increased speculation amongst investors encouraged to borrow by low interest rates.

Quantitative easing by central banks – flooding economies with money – has reduced yields on sovereign bonds. Foreign exchange trading volumes have been hit by regulatory probes into alleged manipulation of benchmarks which have led to the suspension of several senior traders and, as the FT writes, “the kind of chatter that previously drove ‘noise trading’.”

Commodity markets are not immune either. Oil prices are as stable as they’ve ever been since before the 1970s energy crisis. In turn this means large buyers like airlines have less incentive to use hedging instruments to keep volumes ticking over.

“You need a catalyst to hurt markets,” suggests Mislav Matejka, European equity analyst at JPMorgan. However, the duration of previous periods of calm between 1991 and 1996 and from 2003 to 2007 suggest things are not going to change overnight.

But, as with earthquakes, no one knows exactly when they will.

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