Bill Emmott - International Author & Adviser

Article

The dollar near its trough
Corriere della Sera - November 26th 2007

The most famous, if rather callous, saying about investment is attributed to Baron Nathan Rothschild, one of the founders of the great banking dynasty. He apparently said that “the time to buy is when blood is running in the streets”. What he meant was that the right time to invest is the moment when pessimism is at its peak, for after that point prices are much likelier to rise than to fall. The difficulty is working out quite when pessimism really has peaked, in the absence of blood-stained evidence. Nevertheless, there is a good argument for wondering whether that peak might be near, in the case of the American dollar.

            The argument begins with a frivolous observation. Recently a supermodel, Gisele Bundchen, was reported to have refused to be paid in dollars and to have insisted on always receiving euros. Then an American rap star, Jay Z, changed his act by waving bundles of 500 euro notes instead of his usual dollars. Once celebrities start to take positions on the currency market, it may be a sign that a trend has reached its limit. They are not famous for being financial visionaries, after all.

            The main, more serious, point though is that the dollar has already fallen a great deal in value against the euro. Since January 2006, it has dropped by 20%. New records are set every month. But can it really fall much further? Of course, in principle it could keep on falling forever; that is what happens to currencies such as the Zimbabwean dollar, which suffer from hyperinflation. Yet the American dollar does not have that problem.

            The American economy may well be entering a recession, or else a long spell of slow growth, thanks to the collapse in its housing market and the disaster in subprime mortgages and other securitised financial assets. However currency markets, like other forms of speculation, are usually a leading indicator, not a lagging one; they usually drop in anticipation of trouble, rather than waiting for it.

            The United States, it is true, has a big deficit on the current account of its balance of payments, which has reached more than 6% of GDP. But thanks to the falling dollar, which has set off a boom in American exports, that deficit is now dropping. It is also true that faith in American leadership has faded, which may have also worsened sentiment towards the dollar. Yet in one year’s time a new American president will have been elected, with a mandate to restore that faith.

            So I wonder. Could it soon be time for supermodels, rappers and other more conventional investors who are holding euros to place a bet on the dollar? The risk that it will fall another 20% must be small. The chance that, during the next year, it will start to recover looks higher. Quite possibly, there is still a big readjustment to be had between Asian currencies, especially China’s renminbi, and both the dollar and the euro. But between the dollar and the euro? It feels as if Baron Rothschild’s moment may be near.


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