Dollar May Ail In the Medium Term

Dollar May Ail In the Medium Term

over 3 years ago2 mins

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According to a report from investment bank Goldman Sachs, the real value of the US dollar could fall more than 20% in the next few years – and it’s recommending investors position their portfolios accordingly 💸

What does this mean?

The “trade-weighted” dollar – a broad measure of purchasing power versus overseas currencies – has fallen 5% in recent weeks after surging in March. But Goldman thinks this may be just a taste of things to come. The bank points out that the last time the dollar grew this expensive, in 2002, it subsequently experienced a sustained drop in value.

The dollar tends to move in 5-year, 30% cycles (Source: Goldman Sachs)
The dollar tends to move in 5-year, 30% cycles (Source: Goldman Sachs)

The bumper returns of American stocks and bonds have long benefited the greenback: investors looking to buy these do so in dollars. But with US interest rates now slashed and foreign exchange volatility picking up, Goldman predicts investors will increasingly hedge their bets by going overseas 🌏

What’s more, other countries are looking to lessen the prevalence of dollars in their national piggy banks. And with the US government ramping up bond issuance to cover rising debts but its central bank likely keen to keep rates low and boost the economy by making borrowing cheaper, a depreciating dollar may be the result.

Why should I care?

Although fears of a US-China trade war revival mean Asian currencies outside Japan should be avoided for the time being, Goldman has a few tips for global investors who subscribe to its dim dollar outlook 🌟

The Norwegian krone looks cheap among developed markets, while the Mexican peso is favored among emerging economies. And if the European Union’s groundbreakingrecovery fund becomes reality, then theeuro could be set to rise rapidly in value too. (Check out our Currency Trading Pack for some practical pointers.)

The dollar’s volatility-adjusted return has fallen relative to the euro
The dollar’s volatility-adjusted return has fallen relative to the euro

There are risks, however. A resurgent coronavirus and potential “double-dip” recession around the globe could send investors flocking back to the safe havens of dollars and dollar bonds, especially if interest rates suffer deeper cuts elsewhere. And if US stock markets outperform more economically sensitive “cyclical” overseas counterparts (like Europe’s), then the dollar may not be done just yet…

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