LONDON, 22 November 2004 — The economy in the United States has recovered. A growth rate of 3.8 percent is predicted for this year propelled by job growth acceleration, a surge in capital spending, improved exports, and an increasing need for businesses to boost their current inadequate inventory levels.
China, on the other hand, is showing greater dynamism with a forecast GDP growth rate of 8.5 percent this year, as robust export performance coincides with strong domestic demand.
The euro zone, with emphasis on Germany and France, underscored a rather weak performance with the strengthening currency endangering efforts to compensate for weak domestic demand with export-led growth.
Consequently, this improved global economic growth outlook has triggered a renewed risk appetite by international investors.
With this introduction, it is worth exploring the threat that could disrupt these rosy scenarios, namely the direction of the US currency! The dollar has been sliding and it could slide even further. The currency hit an all- time low against the euro in the wake of George W. Bush’s re-election in early November with a wave of sell-offs for fears of four more years of widening US budget and current account deficits, and increased geopolitical risks.
It seems like every one is selling the greenback. Euro buying and dollar selling contracts by speculators hit a record last week. There were “rumors” that China, Russia, India and some Middle Eastern countries were also selling dollars. All this has led to a weak dollar despite intervention by central banks.
In contrast, last week’s comments by US Treasury Secretary John Snow favoring a “strong dollar” policy apparently didn’t convince investors. They took his remarks as mere rhetoric as the dollar continued its slide despite the strong economic data. This is a moment for investors to reflect on these trends especially if they hold portfolios in various currencies, or having the US dollar as the reference currency. Let’s examine the dollar against the main currencies.
The dollar, generally speaking, lost ground against major and secondary currencies. The euro penetrated the psychologically important 1.30 barrier, the Swiss franc remained strong at 1.166, the Japanese yen hit 103.80, and the British pound broke again the 1.86 level. Despite the higher than expected CPI inflation rate and the impressive increase in industrial production last month, the dollar still failed to gain ground. Simply the dollar could not find any support! Investors need to take advantage of market and currency appreciation by including non-dollar investments in their portfolios as a form of diversification.
The question often asked: When the dollar falls, it falls against what? Is it the weak data or negative perception, or is it something with more intrinsic value to it? I believe the answer is gold. It adds value to today’s higher inflationary environment. The rush for gold appears to have started! Gold posted a new 16-year high breaking $446 (up 20 percent from its $372 low posted last May) after the dollar continued its slide against major currencies. Silver also posted a new high at $7.65, it followed gold on its way up.
In the short-to-medium term perspective, investors need to follow trends in currencies very carefully and hedge against fluctuation. It also makes sense to diversify into portfolio structures consisting of various industries and sectors in Europe, Asia and the United States. Finally, a reminder to consider a portion in bullion.
(Habib F. Faris is vice president at Clariden Bank, London)
(The information contained here in is for information only and should not be construed as an offer or a solicitation to purchase, subscribe, sell or redeem any investments. While Clariden Bank uses reasonable efforts to obtain information from sources, which it believes to be reliable, Clariden Bank makes no representation or warranty as to the accuracy, reliability or completeness of the information.)