The end in sight
No, the headline does not refer to the debt crisis or any other of the more recent global economic woes. Rather, it relates to a much longer-running phenomenon, namely the decline of the American dollar. This is now in its seventh year — a long time in the currency markets, even for a primary trend. For at least two years, therefore, analysts have been on the lookout for the point at which the dollar’s fall might come to an end or even reverse. Yet repeated efforts to determine that point have been proven wrong. This week has seen a renewed wave of dollar-selling, sending the greenback through the level of 1.50 bucks to the euro and to new lows against various other currencies; critically, the trade-weighted value of the dollar has plumbed new depths, confirming afresh the major bear trend.
Only two things are certain with regard to the decline of the dollar. One is that it will end sometime, and the other is that most speculators and almost all investors will miss it. That is the way it always is with every major trend in markets, and there will be no precedent set in this respect. It’s important to stress that, because dollar pessimism is now so deeply entrenched that not only have many ordinary people come to think it is irreversible, but some clever ones have made an ideology out of it. They start from a belief that the US is in terminal decline as a superpower and that it’s financial and economic clout is waning rapidly (in favour of China, India, Eskimos, Martians or whomever…). Therefore, by extension as it were, it follows that the dollar will continue to sink until eventually the barbarians sack Washington and the American Empire crumbles into the dust, etc. etc.
The important point to note, in our current context, is not whether this theory is valid or nonsensical, but that it has no relevance to what will happen in the currency market next week, month or year. Even if Attila the Hun (or whomever) conquers the US in 20 or 50 years time, that won’t prevent the dollar rising this year or next – if there are more buyers than sellers. That apparently banal definition of how markets work is far more important for the dollar’s immediate and near-term future than the rise and fall of empires across the centuries. And, although currently and for most of the past seven years, there have been more sellers of dollars than buyers, that situation is not guaranteed to continue.
Why should people buy dollars – that’s the critical question. We all know why they are currently selling dollars: firstly, to buy imports from other countries; second, because the US economy is weak; third, because US interest rates are low; fourth, because they have better things to do with their money elsewhere. Any and all of these reasons may be true, in any order, for different people. But none of them are immutable.
Thus the demand for imports can fall – indeed, it already is, but by nowhere near enough (patience, the recession is only just starting…). As for economic weakness and low interest rates – patience, again. True, America is in big trouble, but others – Japan already, the UK and Europe soon, emerging markets later – will all catch up. Then the ugly contest will really take off: “yes, the dollar is unattractive, but the euro looks even worse and the yen is completely disgusting…” In order to rise in value, i.e. attract buyers, the dollar doesn’t have to be good, it just has to stop being the worst and start being less bad.
It’s already less bad than the pound sterling, against which its low was made last summer. That’s why there’s so much talk of an impending low against the euro – an artificial currency with severe congenital defects which may now be getting worse and which may soon start making the dollar look less bad. The yen is an even more artificial item because, although it represents a real country, the bureaucrats who run Japan can and do determine how far the yen will rise or fall, and at what pace.
Currently, there is a strong feeling that the euro can’t rise much more without serious damage being inflicted on the European economy. Therefore, say many analysts, the dollar won’t go past 1.60 to the euro and is likely to stop somewhere between 1.55-1.60. Maybe, maybe not. But one way or another, the end seems nigh for the dollar’s decline.