Betting Against the Dollar? This Time, Asia May Deserve a Look

Betting Against the Dollar? This Time, Asia May Deserve a Look


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By WILLIAM J. HOLSTEIN
Published: November 18, 2007

JIM O’NEILL, the chief economist of Goldman Sachs, has been down on the American dollar for at least 10 years. “Being bearish on the dollar has been one of the easiest things to do,” Mr. O’Neill said. And there are still lucrative currency bets to be made, Mr. O’Neill and many other financial professionals say, even though the direction of the American currency isn’t as obvious today. “It’s getting trickier,” Mr. O’Neill said.
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Haruyoshi Yamaguchi/Bloomberg News

A yen-to-the-dollar rate last Monday in Tokyo. The dollar has not fallen nearly as much against Asian currencies as it has against the euro.

One reason for the difficulty is that the dollar has lost so much value against the euro, the British pound and the Canadian dollar that it may not have much further to go before it reverses course against them. Mr. O’Neill, who is based in London, points out that while it took just 84.5 cents to buy a euro as recently as six years ago, it now takes $1.45, a move of more than 70 percent.

If the cheap dollar continues to help spur American exports and thereby reduce the trade deficit, Mr. O’Neill says he thinks that the dollar may be near its bottom against those currencies. “The dollar could weaken further in the very short term,” he says, “but a year from now I personally expect the dollar will be stronger against most European currencies.”

But that’s not likely to be the case with Asian currencies, like those of China, Japan, India and even tiny Singapore, in his view. “Many of these economies are seeing enormous growth,” Mr. O’Neill said. And the dollar has not lost as nearly much value against these currencies, which tend to be controlled or influenced by the government. China intervenes in foreign exchange markets to manage the value of the yuan and has allowed an upward drift of only about 5 percent year to date. Japan does not intervene, but its huge pools of liquidity and near-zero interest rates have spawned the so-called carry trade, in which hedge funds and other major institutional investors borrow money in yen and convert the yen to other currencies to invest in other markets. The practical effect has been much the same as government intervention: the yen has risen only slightly against the dollar.

Despite some Asian governments’ desire to keep their currencies where they are, many experts believe that big upward moves are inevitable throughout the region. “The game is just getting ramped up,” said Arthur P. Steinmetz, senior vice president and portfolio manager at the OppenheimerFunds in New York. “There are some powerful fundamental forces that are going to make this interesting.”

One of the most important, says Mr. Steinmetz, who manages $22 billion in mutual funds, is the direction of interest rates in the United States. “The biggest driver of movement in currencies is interest rate differentials,” he said. “Money naturally flows to countries with high interest rates and away from countries with low interest rates. The United States is a low-yielding country and interest rates are going lower because of what the Federal Reserve is doing.”

Add it all up and it may be time for individual investors to make decisions not only about whether to invest in dollar-denominated or other instruments, but also whether to choose mutual funds and exchange traded funds that have the appropriate exposure to Asian currencies rather than relying on plain-vanilla international funds that may be equally exposed to different regions of the world. (Very few experts recommend that individual investors become involved in foreign-exchange derivative trading or in buying individual non-American stocks.)

But charting a winning Asian currency strategy is hard because stock markets in China, Hong Kong, India and elsewhere in the region are at or near all-time highs — China’s stock market has more than doubled this year — and a vast majority of experts expect corrections if not short-term crashes.

What’s an investor to do? “I would invest through funds whose managers know how to shift from what’s too high to what’s cheap,” said Roger Kubarych, chief United States economist for UniCredit Markets and Investment Banking, who is based in New York. “That’s why you go to professionals. Any individual would have to study the markets for two or three years to understand them. Starting from a standing stop, you’re better off in mutual funds. There’s no doubt about it.”

From: Nytimes.com