Wednesday, May 25, 2011

Dollar bears

The U.S. dollar seems to be losing its status as a store of secure value and it's difficult not to see this both as a contributing factor to, and as symbolic of, a world-wide loss of confidence in the United States itself.

A Bloomberg report published today makes it clear that most of the top-performing global fund managers are sticking to their "long-term bets against the U.S. dollar even as the currency has rallied more than 4 percent since the end of last month." Despite the recent rally, the dollar is still down 12 percent in the past year against a trade-weighted basket of six currencies.

Alessio de Longis, a New York-based currency strategist, was quoted as saying that "the long-term fundamentals still look terrible for the dollar... The U.S. has worse monetary policy and worse fiscal policy than other countries, and that is a bad combination..."

Bill Gross of Pimco said that investors should "revolt" against Federal Reserve-engineered low interest rates and seek alternatives to U.S. bonds. Michael Gomez, also with Pimco, said that Asian currencies were only part way through a multiyear appreciation against the dollar. "We think this is a powerful trend," he said.

The rising Chinese currency (the yuan) is not yet convertible but many believe that Asian countries such as South Korea and Malaysia will let their currencies climb along with the yuan. Other currencies to get a favorable mention in the Bloomberg report were the Australian and New Zealand dollars, the Norwegian krone and the Swedish krona.

Anthony Norris of Wells Fargo thinks the U.S. dollar will rally later in the year but still believes the dollar has to decline in the longer term.

There are, of course, dissenting views, but the fate of the dollar rests with interest rates and government finances, and U.S. monetary and fiscal policies do not inspire confidence.