The US dollar could be on the verge of a long-term rally driven by increasing signs that a recovery is taking hold in the world’s biggest economy. Analysts say that could affect commodity-backed, emerging-market currencies l ike the rand in both positive and negative ways.
“Our view is that the dollar rally is only just beginning,” says Alvin Tan, a London-based foreign-exchange strategist at Société Générale (SocGen). “The US economy is f inally recovering and that will support the dollar. On t he other side t he problems with the euro and more, and continued monetary loosening in Japan will further support the greenback.”
Already the Dollar Index, which tracks the value of the greenback against the currencies of six US trading partners, is trading near the highest in seven and half months on increasing signs of US economic recovery. Perhaps the biggest positive out of the US is the improvement in the housing market with Commerce Department data showing that new home purc hases c l i mbed t o $437 000 in January, the highest level since 2008. Bank of America has also estimated that US home prices will rise about 8% this year, a big factor in an economy where consumers account for about two-thirds of GDP.
“US data is clearly looking more encouraging and that is supportive of the dollar,” says Malcolm Charles, a bond portfolio manager at Investec Asset Management i n Cape Town. “The robustness of the recovery seems to be a lot better than it has in recent years.”
So good are the signs that none other than Bill Gross, the co-chief investment officer of Pacific Investment Management Co ( Pimco), the world’s biggest bond fund, doubled his forecast for US growth this year to 3%. That’s up from a December forecast that gross domestic product was likely to expand between 1.25% and 1.75% in 2013. While it’s a big call considering the median forecast of economists surveyed by global data provider Bloomberg is 1.8% growth in the US economy t h i s y e a r, the fact remains t hat when
Pi mco talks, people l i sten. With the dollar having a l r e a dy a dvanced from $1.36 per euro on 1 February to $1.2996 at the time of writing, SocGen is now calling for the greenback to reach $1.20 to the euro by year-end as eurozone debt woes continue. The French bank is also calling for the dollar to advance to 100 yen by end-2013 (from 96.18 currently) and 1.06 Swiss francs (compared with 0.95 now).
However, for most South Africans it’s the dollar’s effect on the rand that counts. A recovering dollar could further hurt the rand, already the worst performing emerging-market currency in 2013, as it undermines the price of SA’s commodity exports, which are priced in dollars.
“The rand is already suffering from SA’s negative fundamentals such as the strikes, slower growth and the massive current account deficit,” says Brigid Taylor, a currency analyst at Nedbank. “If SA suffers another sovereign downgrade it won’t be pretty for the rand.”
Taylor expects the rand to average between R9.08 and R9.20 per dollar in 2013 but says the local currency could easily slide to as weak as R9.80. But while a stronger dollar could undermine the value of the rand in the short term, a recovering US economy could also buoy the currency over time.
“A st ronger US i s ver y good for emerging markets as an asset class,” says Charles. “A stronger dollar could undermine f lows into SA’s bond market but the improvement in risk sentiment that would come from a US recovery could see a resumption of f lows into our equity market, which may be rand supportive over time.”
Dollar Index Spot
Foreign investors were net sellers of over R4bn i n SA equities l ast year, though inf lows into the bond market totalled R87.8bn.
Charles says while the rand is probably at “fair value” at its current level of R9.18 per dollar, Investec expects it to trade between R8.75 and R9.25 over the next six months.