Jamal Mecklai: Thoughts from Turkey (and elsewhere)

Could we be moving into a new global order where both euro and dollar remain weak, with other currencies and commodities providing the balance?

Boy, ain’t life grand? I just returned from a week in Turkey and before I left, I had started writing a column in which I did a mea culpa on my — seemingly solo — belief that the dollar’s long decline was overdone.

When DXY fell below 80 at the end of September, I had thought that it had gone too far, but, when the Fed’s QE2 programme did the unthinkable — pushed the US dollar below parity with the Aussie dollar — I thought that maybe, after all, I was wrong and the conventional wisdom was right and the dollar would go into an even deeper swoon. While thinking all this, I also feared the historic reality that markets only turn when the most recalcitrant of believers throw in the towel.

And, as I — the last Mohican — prepared to do just that, God, I suppose, intervened, I had to rush off and never got the article completed.

So, here we are, I am back from Turkey and the dollar has finally turned upwards as I had been promising for several months.

APPLAUSE, PLEASE.
But, and there’s no rest for the weary, is there, the question remains — is this a turning point? Is the dollar going to strengthen from here? Or, will it flatter to deceive and dive like a single swallow as winter sets in?

Well, I don’t know, of course, but perhaps we can glean some thoughts from my trip to Turkey. I was invited to give a talk at a dinner in Izmir, with about 20 or 25 local bankers and business people. At the end of my presentation, I asked how many of them believed that Turkey should aggressively pursue its on-again off-again romance with the European Union.

Only two tentative hands went up.

When I congratulated the group on their confidence in themselves and the New World, one young man pointed out that Turkey had already achieved two of the three supposed benefits from joining the European Union — political stability and increased investment flows. The third expected benefit of joining the EU — improved economic stability — has clearly become something of a bad joke today, with Irish government bonds yielding nearly 9 per cent, Greece wobbling nervously again, and the basic question of long-term eurozone stability wafting through global markets as an uncomfortable odour.

In other words, “fundamental” euro strength is out, at least for now.

But what about “fundamental” dollar weakness? Hasn’t President Obama announced that he will double US exports in five years, and doesn’t that require a weak dollar? Won’t QE2, whether or not it succeeds in regenerating US growth, also play to the weak dollar orchestra? And since it is clear as a bell that US influence in the world is on the wane, wouldn’t that, too, suggest a weak dollar over time?

Yes, on all counts, but note I said “weak” not “weaker”. The fact is that the dollar is already weak right now, which explains why US exports have been picking up, and, Allah be praised, so is US employment, if the October report was any indicator. Over its entire life, the euro has moved between 0.81 cents and nearly 1.60, which means that today’s level of 1.36 is just 30 per cent from the dollar’s weakest point. As I said, the dollar is already weak.

Another thing to remember is that markets are seldom linear and sometimes even dramatic policy changes — QE2, for example — simply have the effect of pushing on a string. Again, it could be that the market was fully positioned for the QE2 announcement, so it was a classic, sell (dollars) on the rumour (expectation) and buy on the fact.

Well, could we be moving into a new global order where both the euro and the dollar remain weak, with other currencies — high yielders and those with current account surpluses — and commodities providing the balance?

Clearly, the recently concluded meeting of the G20, which, come to think of it, is really just a face-saver for heretofore “developed economies”, has already defined a new global order. And while this does suggest that, over time, some currencies may move to a higher plateau, we need to remember that we are speaking about MARKETS, which, by definition, rise and fall, and reach all sorts of unbelievable levels at different times.

I can imagine somebody 50 years hence saying, “Can you believe it — the Aussie even broke parity with the US dollar briefly back in 2010?”

And, what about gold? Well, I thought it would peak at 1,300, but one of the largest jewellers in the South told me he had no doubt it would hit 1,500 in a few years — I guess gold will always be the wild card.