US Dollar Likely to Remain Best Currency in Town Through 2014

09/02/2014 4:59 pm EST


Jim Jubak

Founder and Editor,

With the dollar showing a strong upward trend and the US economy heavily outpointing the competition on economic growth, MoneyShow’s Jim Jubak believes the US financial markets look like they will remain the best game in town for much of the remainder of 2014.

A weekend of bad economic news has put pressure on central banks in the EuroZone, China, and Japan to do something to stimulate economic growth. With US growth above 4% in the second quarter, on the other hand, the Fed looks headed for further reductions in quantitative easing while other central banks are just moving to start their own asset purchases.

Yes, the Fed and the other major central banks are that far out of sync.

And that means the dollar is likely to continue to climb against currencies that include the yen and the euro as financial market anticipate the beginning of US interest rate increases in 2015.

The bad news Sunday came from the EuroZone where the purchasing managers index from Markit Economics showed the manufacturing sector slowing further. The index dropped to 50.7 in August, barely above the 50 mark that separates economic contraction from expansion. The reading was the lowest in 13 months and puts further pressure on the European Central Bank, which meets Thursday, September 4, to announce a program of asset purchases that might lower interest rates, increase bank lending, and cheapen the euro price of the region’s exports.

The European Central Bank is scheduled to report new projections for economic growth on Thursday as well. The bank’s economists are expected to lower the current projected growth rate of 1% for 2014.

Data released over the weekend showed a slowdown in China’s manufacturing sector as well, with the official purchasing managers index for the manufacturing sector falling for the first time since February to 51.1 in August. The index had come in at 51.7 in July.

The slowdown doesn’t come as a surprise since, in recent weeks, other measures of economic activity, such as electricity consumption, credit growth, and steel output, have been weak in July. In addition, the real estate sector has continued to show falling prices and sales. The consensus explanation and expectation is that a package of stimulus measures introduced earlier in the year is no longer lifting the economy and that the government will introduce a new stimulus package, perhaps including China’s first cut to its benchmark interest rates since 2012.

Meanwhile, in Japan, the yen fell to its lowest level against the US dollar since January 10 on speculation that Japanese Prime Minister Shinzo Abe will try to revive his weak yen/higher inflation/more growth economic policies by appointing an ally to take charge of changing investment policy at the Government Investment Pension Investment Fund. A hefty increase in the national sales tax in the spring stalled Abe’s growth plans and the government is widely expected to do more to redirect the pension fund from government bonds to domestic and overseas equities.

The US dollar’s current strength is partly a result of safe haven buying on the Russian invasion of Ukraine and, therefore, an end to that crisis would cause money to flow out of the dollar and back into other currencies. But I’d expect that reversal would be temporary and would mark a dollar buying opportunity in the face of slow growth overseas and policies to weaken the yen and the euro.

With the dollar showing a strong upward trend for the rest of 2014 and with the US economy heavily outpointing the competition on economic growth, the US financial markets look like they will remain the best game in town for much of the remainder of 2014.

Falling asset prices in the rest of the world will set up global markets for a possible reversal of that trend in 2015 and I’d certainly be thinking about selective selling at all time US highs as we move into the fourth quarter so that you can rotate a portion of your portfolio into non-US assets in anticipation of a potential rally in those assets non-US in 2015.

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