Nasty choices

US dollar may smile at end of 2013 ugly contest

The world’s leading currencies are in an ugly contest. Central banks are bent on debasing them with active printing presses and ultra low rates. Small wonder gold is over the moon and the Australian dollar, paying a mighty three per cent interest rate, is considered a beauty. The yen is determined to come last. The euro’s nerves have improved but it is still fragile. The dollar and the pound are most likely to show strength, especially later in 2013.

While other majors have suffered in the last five years the yen, despite some recent slippage, has been running at its highest against the dollar since the mid-1990s. But the backdrop is shifting. Exports are struggling, the current account surplus is dwindling and Shinzo Abe, elected prime minister on December 16, wants more money printing and a weaker currency.

The European Central Bank may seem a comparative model of prudence. But its bond buying and liquidity provision means its balance sheet, just like the Fed’s, has roughly trebled since 2007. The euro contestant’s nerves have improved markedly since Mario Draghi, the ECB president, made his summer “whatever it takes” promise. The euro has risen from $1.21 to over $1.30 in the second half of 2012. It might go higher still early in 2013, to say $1.35, if markets remain optimistic on Europe. But as recession bites in the periphery, the euro’s ability to avoid nervous breakdown will remain in serious doubt.

The pound is hardly sound. Yet, the UK is expected by the IMF to grow faster than Germany in 2013. If recovery proceeds, London’s printing presses may stay quiet. The pound’s chances of rising to 75 pence per euro from the current 81 pence are good. But all major currency movements depend ultimately on the US dollar. Here, massive monetary debasement contrasts with slow fundamental economic improvement. House prices are rising, unemployment is falling, and US growth in 2013 is predicted at 2.1 per cent by the IMF — 10 times better than the 0.2 per cent forecast for the Euro zone. It is faster growth that gives the dollar upside attractions against the euro. But a 2013 replay of the fiscal cliff drama would be a definite negative. The Fed’s response would be to print still more money. Now that would be ugly.