Seeker Blog

Marc Chandler, chief global currency strategist at Brown Brothers Harriman, argues that the USD decline is about over. When might the trend turn up? Stay tuned…

We have suggested that the US dollar’s multi-year decline is nearing an end. We suspect it has already bottomed against the Canadian dollar and British pound. At the same time, we do recognize the negative interest rate shock that keeps the dollar vulnerable.

We have identified a few factors that we think will help the dollar carve out a low in addition to the market pricing into its interest rate trajectory a deep US contraction, which with real rates across the curve (nominal adjusted for CPI) well below zero, are implying.

For example, our analysis of trade and competition, leads us to believe that foreign companies will compete in a weak dollar environment by locating more of their production and sourcing to the US–following the successful example of Japanese auto makers, for example. This would be picked up in the foreign direct investment flows, that many foreign exchange market participants give short shrift in favor of portfolio flows.

Data from Thomson Financial suggest that direct foreign investment flowed into the US to the tune of $414 bln, an incredible 90% increase over 2006. And the flows have been sustained at the start of the New Year with another $22.6 bln FDI in the first two weeks of January.

The reliance on hot capital, ie short-term portfolio flows, to fund the US current account deficit has often been cited as a vulnerability for the dollar. Consequently the direct investment flows, should they be sustained, seems to be a net positive factor for the dollar. The currency value of the direct investment flow is not frequently hedged, even if the income generated from such investment is.

…The fact the market has discounted a hard landing to the US economy, that direct investment flows are increasing and the US equity market has begun 1-3 month perspective) outperforming are pieces of a jigsaw puzzle that we think help bring the multi-year dollar downtrend to a close.