Strong Dollar Is Affecting Global Trends

2012-06-06 - BBSP

iiSEARCHES,  06 June 2012

The U.S. dollar is showing signs of “durable strengthening” as the U.S. economy goes through early economic recovery, according to research carried out by independent research house BBSP. This is affecting investment appetite, attitudes towards the euro zone crisis and the position of emerging markets in the global economy. “There is a growing consensus for a strengthening of the greenback against the euro and we do subscribe to this view—we believe the trend has just started,” commented Philippe Sadock, founding partner and group ceo. “One question that gets heavily discussed in strategy boards is whether we should attribute the greenback’s return to an early economic recovery in the U.S., or do we stand on the verge of an escalating global recession scenario?” continued Sadock. Based on its scenarios, BBSP believes in the former, adopting a “moderate view” on the euro zone crisis. “We feel that the European market is safe enough and that the future setbacks offer buying opportunities on a selective range of quality assets,” he told iiSEARCHES. The firm’s researchers are predicting that a strengthening U.S. dollar will “exert bearish pressure” on the price of commodities, with gold especially affected by the trend. “We would suggest that investors reduce their gold exposure, as we are unsure it can still assume its historical role of secure hedge,” Sadock advised. With gold prices breaking the USD1,800 per ounce record last August, investors have long been concerned about a possible setback. Sadock added that a “controlled deceleration” in China and other emerging markets would “fit nicely” with the outlined scenario. “We do have technicals to back that scenario up and that’s the insight we’ve been giving our clients for some time regarding the dollar question,” he elaborated. “We believe they shouldn’t focus too much on the European side, and the strengthening of the greenback will also play against the majority of the emerging currencies: South African rand, Turkish lira, Korean won, Brazilian real, among others,” he added. With this in mind, BBSP believes that the “paradigm shift” of the world’s economic centre of gravity from the West to Asia “may have to wait some more time.” The U.S. dollar’s status has always been “the crux of that matter” in the eyes of the analysts. Its strengthening position “might bring some balance into the West/emerging markets dynamic.”

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