US economic output unexpectedly shrank in the last quarter of 2012 – the first contraction since the 2009 recession – sparking concerns over the strength of the world’s largest economy.
Marcus Bullus, trading director at MB Capital, says: “For every step the US economy takes forward, it seems to take one step back. Like other developed economies around the world, it just can’t seem to maintain momentum.
“The extremely weak export numbers offer an insight into why – the US economy is dependent on demand from other economies, but too often that demand just isn’t there.”
The Federal Reserve’s decision to maintain near-zero interest rates and the bond buying programme at the end of January has been a major contribution to the weakening dollar.
Jan Dehn, co-head of research at Ashmore Investment Management, explains: “The stability of the dollar in the past years is due to the good neighbourly behaviour of emerging market central banks, which have actively supported the dollar and US treasuries during the tough early stages of the crisis.
“Since 2008-09 emerging markets bought more than $2trn (£1.3trn) of US treasuries.
However, he adds: “The very fabric of the global monetary system has within it the seeds of its own destruction. The Triffin Dilemma, an important economic insight named after the Belgian economist, says that major reserve currencies such as the dollar are inevitably destroyed by their own success. This happens because the country issuing the reserve currency necessarily racks up ever larger public sector liabilities in order to export its currency to surplus countries. And these liabilities eventually undermine the currency.”
Since the start of the year, the dollar has increased by 2.59 per cent against the pound and by 5.48 per cent against the Japanese yen, but it has also fallen by 2.69 per cent against the rapidly appreciating euro.
“The yen has been seen as a ‘safe-haven’ currency, at a time when investors have been worried about the risk of devaluation of other currencies such as the American dollar and the euro,” explains Paul Chesson, head of Japanese equities at Invesco Perpetual.
“As we move through the economic healing process, especially in the US, and as the risk of ever more aggressive monetary policy subsides, I believe investors will begin to hate the dollar a little less, and fall out of love with the yen a little more.”
But after what Stuart Thomson, economist at Ignis Asset Management, refers to as “the dollar’s 11-year bear market”, 2013 could be the year that sees the currency return to its pedestal and embark on a significant bull market.
Jenny Lowe is features editor at Investment Adviser
