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| The greenback can come back |
| Ian Campbell / Aug 13, 2009, 00:50 IST |
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Dollar: The dollar has a lot going against it – mammoth fiscal deficit, deep recession and a money-printing central bank. But Ian Campbell argues there are good reasons to believe the greenback’s seven-year slide is at an end.
The dollar is tarnished. Undermined by a mammoth fiscal deficit, soaring debt and recession, debased by its own money-printing central bank, down against the euro by 55% since 2002, and out, no longer fit to be a reserve currency, the greenback has been a scapegoat for the US ’s egregious bubble and burst crimes. Yet there are reasons to believe the dollar’s seven-year slide could be at an end. The much-maligned American currency may have upside.
The dollar’s appeal now lies essentially in two things. The US will recover from recession before other countries; and the dollar, unlike rival currencies and gold, is cheap.
The recovery case isn’t clear cut. There is still a lot wrong with the US economy and the global one. But recent data point to US economic growth in the third quarter after contractions in five of the past six quarters. A lagging indicator, unemployment, is among the most promising. The monthly jobs data has improved markedly in the past three months. Firms are laying off far fewer workers. They must be beginning to find demand for their goods and services.
Perhaps that is not so surprising. Fiscal and monetary policies are extraordinarily stimulatory – and the fiscal deficit is unnervingly large. But a purging of excess during the recession is also part of it. Following a plunge in prices throughout the country and by around 40 per cent in the west, the housing market looks to have bottomed. The monthly trade deficit has plunged by 60 per cent from its peak levels – despite high oil prices and a continuing high bilateral deficit with China.
In four of the past six quarters consumer spending has fallen in real terms. This is its first big correction for decades. The savings rate has risen. Americans’ belts have tightened and cannot be loosened much now, given the huge loss in personal wealth caused by the bursting of the house price bubble. But a modest pick up in spending is on the cards.
There are also some encouraging signs in the eurozone and Japan . German exports, for example, jumped in June. But consensus forecasts predict that German and Japanese GDP will contract by about 6 per cent this year – the US one by about 2.6 per cent. And in 2010 the US is forecast to grow twice as fast as Japan or the eurozone. The US is doing better than other developed economies.
Part of the reason is that the dollar has become cheap — and competitive. For more than four years, US export growth has been higher than growth in imports.
If the US returns to growth, the outlook for the dollar changes. The Federal Reserve will cease to expand its balance sheet. The money printing will stop – and be reversed as the central bank pulls hundreds of billions of dollars out of markets and eliminates the money it created out of nothing.
Growth will also bring inflation, even if capacity utilisation is unusually low. The July ISM manufacturing report saw firms paying higher prices for the first time in almost a year. Even a modest rise in inflation will force the Fed to push its policy rate above the current exiguous quarter-percent.
The dollar has been a dog, but its day may be coming. It can prove the recovery play – as Japan and the eurozone are depressed by overvalued currencies and their dependence on exports. It can also be a safe haven if global stock markets suffer an autumnal fall.
There are no doubt many obstacles to a recovery in the dollar. The fiscal deficit needs to be reined in. But if growth were to falter the likelihood is that the authorities would resort to further fiscal and monetary stimulus. That would reignite fears for the dollar as a reserve currency.
But for now a return to growth, to inflation and to a gradual normalisation of monetary policy looks on. For the dollar, currently at a very low $1.41 per overvalued euro, that ought to bring some appreciation.
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