Could the rise and rise of the US dollar be the biggest consensus disappointment this year and gold the biggest winner?
by Peter Cooper, Arabian Money Rather like the oil price crash, the rise and rise of the US dollar was the surprise event of 2014 that every forecaster under the sun now thinks will be the theme of 2015. The consensus often being wrong in investment for well documented reasons, there is clearly reason enough to question this ‘no brainer’ as HSBC’s chief economist has described it. Experts have been wrong about financial markets before. Her Majesty the Queen asked the Bank of England’s staff why they failed to predict the global financial crisis and they blanked. Partly it must be because many experts are paid by a promoter of the boom in question. Estate agents commenting on real estate is an obvious example. The Bank of England’s failure is indeed less easy to understand. Human error? Maybe it was just a natural human wish to err on the optimistic to stay popular or institutional myopia. Foreign exchange markets are the widest, deepest and most liquid of all markets. They discount information, sometimes before it is considered, sometimes a few nanoseconds afterwards. Second guessing them is the most difficult job in banking but essential to managing the huge volumes of business in this business. So when everybody is on one side of a trade it becomes a self-fulfilling phosphesy that this trade will fail. Why so? Because you need buyers and sellers to make a market and it will soon peak or bottom if you only have buyers or sellers. The US dollar looks a bit like this now. Everybody loves the dollar. Besides the other thing we know pretty much for certain is that volatility and surprise events are back in global finance for 2015. That’s a recent trend from the back end of 2014 and can be rolled over into the New Year. Let’s say the Fed does go ahead with an interest rate rise. What happens next? The stock market will fall over and bonds and the dollar rise in value. True but will there then be a rush to exit the US dollar when the Fed starts printing money again in response? Who knows? Or will the great bond rally finally be over and markets set much higher rates? Ot will this simply cause inflation and that’s dollar devaluation by another name? Volatility and surprises And that is really the problem. The rise and rise of the US dollar in 2014 came with a solid and reliable upswing in equities. How reliable is this as a trend for far more volatile US financial markets? Gold has become very oversold against the US dollar although it was the second best performing global currency of 2014. In this sort of chaos for US assets gold would be a more logical safe haven currency than the US dollar with its dollar-denomination but fixed supply. It is not unusual in financial markets for what has been the star performer of one year to disappoint the next, or for the dogs of the financial world to be top dog the following year. Markets do after all work in cycles rather than straight lines. Who know’s what the year ahead will hold but you can be fairly sure that most forecasts will be wrong because they are following trends that will not extend!