Interest money

HAMISH MCRAE: The dollar becomes all-powerful again

HAMISH MCRAE: Warren Buffett says ‘never bet against America’ – what’s happening to the dollar suggests many people agree with him

The dollar has become all-powerful again. We can see this against the British pound, where at $1.26 the dollar is the strongest in two years. But it is even stronger against other major currencies – a five-year high against the euro and a 20-year high against the Japanese yen.

Why? Well, the answer to that tells us something about what’s happening to global interest rates, but more importantly, something about economic power in these troubled times.

The history of interest rates is simple. A higher yield of cash attracts inflows and pushes the currency higher. While the US Federal Reserve has moved more slowly than the Bank of England in raising its rates, it is expected to step up its pressure in the coming months. The European Central Bank will lag behind.

More: The dollar is king in the short term because it offers a better return on cash, but it also offers long-term security in a world that has become much less secure

We will, in all likelihood, have another quarter-point increase here this week, bringing the rate to 1%. The Fed’s policymaking committee is also meeting this week and is expected to raise rates by half a percentage point, also taking its main rate to 1%. But after that, expectations diverge, with markets estimating that US rates will be around 2.5% by the end of the year, while here they should be more like 1.5%.

Of course no one can know, but there is a forecast from Deutsche Bank of a peak in the US of 5% next year, and one from Capital Economics of 3% here in the UK.

As for the ECB, its deposit rate is still negative, which I find totally bizarre given that inflation in the euro zone is on average 7.5%, a little higher than here. However, ECB chief economist Philip Lane confirmed on Friday that it would start raising rates and the only question was how fast to do so. But differential interest rates are only part of the story. It’s hard to overstate the shock that ran through the boardrooms of Europe and the UK following Russia’s invasion of Ukraine.

It’s not just that companies like Renault and BP have lost much of their business. It’s that all of their assumptions about how the world works have been wrong. The difficult question is this. They are smart people. So if they were wrong about Russia, could they be wrong about China too?

It’s not worth speculating about what might be going on between China and Taiwan, but it’s worth looking at some numbers. Start with VW. Last year it sold almost half of its VW-branded cars there – 2,428,100 out of a total of 4,896,900 – and almost 40% of its total vehicles, including Audis, Porsches and more. .

It’s an uncomfortable place, given that China has just described its relationship with Russia as “a new model of international relations”. Or look at the trade as a whole. China overtook the US as the EU’s top trading partner in 2020, although the US remains a more important export market for a number of countries, including Germany.

But according to a report by Bloomberg, a poll of German companies operating in China showed that a third of them were suspending planned activities or investments, and 10% said they could move existing activities out of China. And that was before the last confinements.

It is quite true that American affairs are also tightly integrated with China, much more tightly than they are with Russia. So if the world started to split into two large trading blocs, one clustered around the United States, the other around China, the United States would also suffer to some extent. Just like the UK. But Europe would be the big loser. So from an investment perspective, two things come together.

The dollar is king in the short term because it offers a better return on cash. But it also provides long-term security in a world that has become much less secure.

That’s not to say it’s a good idea to invest in US high-tech stocks right now, where the long-awaited downgrade is finally taking place.

I guess these drops have a certain way of working. But it does mean that from a business perspective, investing in the US is safer than anywhere else.

Warren Buffett, the legendary founder of the American holding group Berkshire Hathaway, put it this way in his letter to investors last year: “Despite some serious disruptions, our country’s economic progress has been breathtaking.” Our steadfast conclusion: never bet against America.

What is happening to the dollar suggests that many people agree with it.