Central bankers from Beijing to Brasilia have been acquiring a lot more dollars of late, but the overweight of the greenback has reached its limits. There is only one way left to go. It is time to sell the dollar once again.
Or so says Jerome Booth.
Booth has been in the currency and fixed income markets since 1999. That’s when he helped launch the Ashmore Group, one of the largest pure-play emerging market fund managers in the world with around $70 billion under management. Before he retired to write books and launch his new private equity firm New Sparta Limited, Booth was a regular source of mine here at FORBES. He’d talk about the wonders of emerging market debt; their relative strength compared to the Western world and how they’ve improved from their “Third World” days of yesteryear; and the day of reckoning that would come when the Chinese yuan becomes a reserve currency.
Dollar panic-selling is possible given the homogenous structure of the investor base in externally-held Treasuries. It’s not in Barclays’ hands. It’s not in Goldman Sachs accounts. Treasurys are sitting in the People’s Bank of China . Trillions of them in fact. As they are in the Russian Central Bank, the Reserve Bank of India and every other major emerging market that requires a nice reserve cushion to save itself from the Western world’s short sellers who like to watch a nice currency bloodbath from time to time.
So far this year, there’s been a consensus view that the dollar can only go up. Interest rates are going to rise at some point later this year. Everyone and their mother will want higher yielding U.S. debt. Treasurys will have many buyers. That’s the gist of it.
But when the dollar falls, it will be because the surplus central banks have determined they have to shed some weight. Booth even goes so far as to say the central banks could dump all at once.
“A rush for the exit by them could cause a dollar crisis similar to that in 1971. They may lose a third of the value of their reserves in the process, but deployment in crisis is what reserves are for. And there comes a point in any trade when cutting ones losses is preferable to pouring more good money after bad,” he says.
Meanwhile, bond investors waiting for a sign that the dollar has truly peaked. China becoming a reserve currency might be a sign.
Until then, emerging market central banks will still have to be careful with the dollar. There is no sense dumping them only to watch their currencies strengthen. In a generally weak economic environment in big reserves, yet recessionary countries like Brazil and Russia, a stronger currency right now is a bad idea. It’s better to build reserves and vacuum clean those dollars out of the local market.
The dollar, therefore, will be at the whims of the Fed and jobs data. But if Booth is right, and keep in mind that pitching emerging markets is his stock in trade, then the dollar squeeze has just begun.
Full article: What The World’s Biggest Banks Have In Store For The U.S. Dollar (Forbes)