A weaker U.S. dollar may be a consensus call for 2021, but many investors are underestimating how steep the currency’s fall could be, longtime currency manager Ulf Lindahl has warned.
In fact, the next four weeks could turn out to be ugly in all markets, with potential for weakness in foreign and U.S. stocks as well as bonds, said Lindahl, who founded Currency Research Associates last year after four decades at currency manager AG Bisset, in an interview. .
In a research note earlier this week, Lindahl argued that, since the value of the dollar is the most important price in the world, a sharp drop over the next six months could have ramifications for investors and businesses in the world. whole world. The next four weeks will be dangerous for those who are dollar long as the odds are high it will accelerate on the downside, he wrote.
Lindahl was looking for a massive sell-off in the dollar this year, which could see the euro EURUSD,
run to $ 1.50, a level last seen in 2009. This would mark a rally of around 22% for the split currency against the dollar, which is now trading north of $ 1.21. Investors underestimate how sharply the dollar can move in the first phase of what he has identified as a 15-year cycle, Lindahl said (see chart below).
The ICE US Dollar DXY index,
a measure of the currency against a basket of six big rivals, is down 0.4% so far in February after a January rebound and remains down more than 12% from its early high 2020 during the financial crisis brought on by the initial pandemic lockdowns.
Major US stock indexes posted mixed performance on Friday, with the Dow Jones Industrial Average DJIA,
on track for a 0.5% weekly gain as it pushed further into record territory, while the S&P 500 SPX,
was 0.4% and the highly technological Nasdaq Composite COMP
was on the verge of a drop of more than 1%.
Lindahl sees pressure on the dollar as foreign government bond yields rise, pushing interest rates down to negative. Yields on US Treasuries will find it difficult to avoid upward pressure, especially as the US government tries to cover a growing budget deficit.
At the same time, Treasury Secretary Janet Yellens insists the need to fix exchange rates through the market is a sign that the United States will not seek to intervene as the dollar collapses, he said. declared. And the Federal Reserve, determined to let inflation exceed its target before acting, means it will not respond by tightening monetary policy.
And while the European Central Bank has grumbled about the dollar’s weakness and has been uncomfortable with the euro’s large gains, it is unlikely to take action in an international context of crisis. increasingly eager to reduce the role of the US currency in the global financial system, he said.
A sharp drop in the dollar, meanwhile, could be extremely painful for non-U.S. Pension fund managers, dealing with capital losses on bond yields and bond prices moving in opposite directions and foreign exchange losses on US stock positions, he said, noting that much of the current generation of European fund managers have never experienced a sustained selloff in the dollar.
In addition, the rise in bond yields will make it difficult to justify strained valuations.
And that means tough times for tech stocks and more dynamic stocks. Lindahl said it called for a rotation of tech stocks to other areas like energy, with a weaker dollar accompanying a commodities boom. Internationally, the more you can buy stocks outside of the United States, the better off you are, he said, while in bonds investors should be in cash or very short-term securities at abroad, the balance being in precious metals.
US stocks are expected to suffer as domestic investors increase allocations of foreign stocks and foreign investors reduce US allocations.
Lindahl said the biggest risk to his scenario would be a surge in inflation, say at a pace of more than 5%, as that tends to boost stocks because they are real assets. Such a development remains unlikely, he said.