12
ECONOMIC SUMMARY
Talk of the death of the dollar
is nothing but an exaggeration
BY MICHAEL HOWELL,
MANAGING DIRECTOR,
CROSSBORDER CAPITAL
So, it is the end of the
dollar. This was the widely
held belief in 2009. Many
pundits claimed it was only
time before the euro, renminbi
or some hybrid unit
took over. Such was the
clamour to avoid the greenback
that dollar exposure
was hammered down to
extremes by late last year.
Despite this year’s rally,
our research shows investors’
overall positions in US
financial assets remain
more than one standard
deviation below trend.
But could we all be
underestimating the potential
long-run strength of
the dollar?
It remains the international
standard of value
and the cross-border means
of settlement. It is likely to
be some years before Asia
and other emerging markets
shift from export-led
growth and a dollar
replacement emerges.
History shows that
although the US economy
eclipsed the UK’s in around
1870 it was another 85
Don’t believe the hype
you hear, because
there is still plenty
of mileage in the
value of the US dollar
as the world’s preeminent
currency
counter counterpoint point
years before the official
stock of dollars in the
world economy surpassed
holdings of sterling.
According to latest IMF
projections, the world
economy is slated to grow
by around 4.5% pa in real
terms between 2011-14,
powered again by bumper
Asian growth in excess of
8% pa. This would be the
fastest clip since 2004-07
but during these years
the US current account deficit
was twice as big at 6%
of GDP.
The only way new dollars
get out into the world
economy is through a US
current account deficit.
This dollar money tap has
been turned off by the
credit crisis – not least
because American households
want to build up
their savings and there is
domestic disquiet over the
size of the US deficit.
Could the world face a
dollar shortage? This gap
suggests a 5% to 10%
annual appreciation in the
dollar over the next couple
of years. Few are positioned
for this. The lesson:
do not dismiss the greenback
too quickly.
United Kingdom
■ Manufacturing activity grew at its fastest for 15 years
in March, with the purchasing managers’ index up to
57.2, from 56.5 in February.
■ In February, the trade deficit in goods and services
fell to £2.1bn, from £3.9bn in January. For goods, the
deficit shrank to £6.2bn in February, from £7.5bn, and
is the smallest deficit since June 2006.
■ Inflation rose sharply in March to 3.4%, up from 3% in
February, according to the Office of National Statistics.
■ UK retail sales had their largest year-on-year gain for
almost four years as total sales values rose by 6.6%,
up from 4.5% in February.
United States
■ The trade deficit widened to $39.7bn (£25.7bn)
in February, $2.7bn up on January. Imports were
up 20.5% on February last year, while exports up
only 14.3%.
■ Economic growth for Q4 has been revised downwards
to 5.6% annualised from 5.9%. This compares with 2.2%
for the third quarter.
■ Manufacturing in March grew by its fastest rate for six
years, with the ISM purchasing managers’ index rising
to 59.6 points, up by 3.1 points on February.
■ Housing sales fell for the third consecutive month in
February, by 0.6%, reaching the lowest level since
July last year.
Japan
■ The country is gearing up for its House of Councillors
election in July with debate over how to deal with
a potential rise in its consumption tax.
■ Bank of Japan Governor, Masaaki Shirakawa, said the
economy is picking up thanks to external demand but
added that deflation is here to stay for three years.
■ The central bank kept interest rates at 0.1% and doubled
the size of low-interest funds it offers to banks in threemonth
loans.
PORTFOLIO ADVISER [www.portfolio-adviser.com] MAY 2010
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