2015 seen as year of dollar strength - unless it delays Fed hike
London (Nov 22) Investment chiefs at the world's biggest asset managers this week unanimously forecast a stronger dollar in 2015, but they were far more cautious than many big banks on how far it would rise against the euro.
Six months into a long-awaited rally for the dollar, Goldman Sachs and Deutsche Bank are among those predicting that this is just the start of a years-long shift in the global status quo that will see the U.S. currency return to parity with the euro.
But like all consensus bets, the danger is that it could come unstuck if dollar appreciation works against the very reason for its strength - an expected rise in U.S. interest rates next year.
A stronger dollar cuts the cost of imported goods and hence cools inflation, meaning the Federal Reserve may not have to do so by raising the cost of money, or at least not as fast. But appreciation also increases the risk that by hiking rates, the Fed drives the dollar past a pain threshold for U.S. exporters.
Aaron Cowen, chief investment officer at U.S.-based Suvretta Capital, said the Fed's hand would be stayed by concern that the dollar would overshoot.
"We think rates stay low, and as a result we think (U.S.)equities are still attractive on a risk-adjusted basis," he told the Reuters Global Investment Outlook summit in New York.
Others were less sure. Saker Nusseibeh, chief executive of UK-based fund manager Hermes, said the concerns about the price of imported oil and food or the competitiveness of U.S. manufacturers that dominated debate about a strong dollar in the late 1990s were no longer applicable.
"The U.S. is self-sufficient in food, water, energy and cheap labour - and they've managed to corner the market in technological innovation," he said. "Therefore, they can afford to allow the dollar to go up."
The other half of the logic behind the dollar's rise is the growing divergence in economic fortunes and monetary policy between Europe and the United States.
Even if the European Central Bank does not embark on full-scale government bond buying like the programme completed by the Fed last month, President Mario Draghi has promised to increase the size of the ECB's balance sheet one way or another.
"The two or three major central banks in the world are moving in the opposite direction. It's very interesting to see both the BOJ and the ECB pushing so hard to get more liquidity into the system," said Andrew Wilson, chief executive for EMEA at Goldman Sachs Asset Management.
"To some extent the clearest transmission mechanism of this liquidity policy is the weakness of the euro's exchange rate. We could see the euro trading weaker from here - below $1.20 is perfectly possible in the next 12 months."
That figure was echoed by several others at the summit, but it leaves relatively little room to manouevre from rates of just over $1.24 on Friday. That would back the predictions of some that, rather than a story of simple dollar appreciation, next year will be about making money out of greater currency volatility.
"FX will prove the place to play," said Pascal Blanque, chief investment officer at Amundi Asset Management in Paris, which manages $1.2 trillion in assets. "When there is pressure in a house, you cannot keep all the windows closed - pressure needs to be released. It is an area of opportunities but also traps."