Nobel Prize-winning author Bertrand Russell said, “In all affairs it’s a healthy thing now and then to hang a question mark on the things you have long taken for granted.”
Among the major currencies of the world, the U.S. dollar has been the main beneficiary in the post Great Recession global recovery era. The five largest economies, U.S., the Eurozone, China, Japan, and The United Kingdom, make up roughly 72% of the global output. Four of these developed economies have bolstered the money supply with huge quantitative easing (QE) programs in order to combat deflation. China, the outlier in this regard, is nevertheless currently experiencing a slowdown in its economy.
The biggest concern regarding the future stability of the global economy is high debt levels around the world. Central Banks know they need to foster inflation in order to whittle away debt, and the United States is the one “QE economy” that’s showing encouraging signs of increased consumer spending and income. Investors recognize the policy divergence between the tightening U.S. and the other major economies still engaged in monetary stimulus and have been piling into the dollar.
The surge in the U.S. dollar’s (USD) value against many major currencies and the huge gains it has enjoyed against many emerging market currencies such as the Mexican peso, Turkish lira, and major South American currencies, makes it time to consider four reasons why the U.S. dollar could be massively overvalued.
1. Perhaps Trump isn’t as good for the dollar as you think.
It is widely believed that President-elect Donald Trump’s proposed policies of lowered repatriation taxes and corporate tax breaks, as well as his economic views supporting a steeper rate hike path will be good for the dollar. After all, USD has risen 4% against the euro in only three weeks. But It remains to be seen if and how these policies can be realistically implemented.
2. The uglier side of Trump’s policies.
In the midst of the prevailing attitude of optimism surrounding the financial prospects of the United States, the geopolitical attitudes of Donald Trump are being lost in the shuffle. Earlier in his campaign many worried about trade agreements and breakdowns in diplomacy arising from his rather blunt modus operandi. These attitudes could well lead to tensions between the U.S. and other nations and a possible weakening of the U.S. economy.
3. U.S. Treasury bonds are selling off.
Since the presidential election, ten-year treasury yields have risen more than 27% to over 2.4%. While much of this money is leading the equity markets to surge to new all-time highs in the short-term (which is still a positive for the dollar), a continued risk-on appetite could lead to this money being exchanged and invested in foreign markets where yields are higher in the future.
4. The U.S. economy would be particularly sensitive to a 2017 recession.
The Great Recession hit America right in the gut, yet here we are with stock market highs and the USD as the cleanest dirty shirt in the hamper of major currencies. A global recession in 2017 could expose an underlying fragility of the U.S. economy and lead investors to a flight into more traditional safe haven currencies such as the Swiss franc and Japanese yen, not to mention assets such as gold in the face of the high debt levels the U.S. currently supports.
The Bottom Line
“King Dollar” has ruled supreme in the last few years, bolstered by accommodative policy divergence, an oil rout, and concerns abroad. The prevailing wisdom that the U.S. dollar is unshakably secure could prove to be folly. If Brexit and Trump’s election taught us one thing, it’s when everyone starts to think one way it pays to be contrarian.
Matt Worley is a corporate dealer for World First USA, Inc.
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