Macroscope | A stronger US dollar is no threat to Asian equities
Earlier this year Steve Forbes co-authored a book called Money: How the Destruction of the Dollar Threatens the Global Economy – and What We Can Do About It. Prominent on the cover is the image of a battered one dollar bill with a savage tear that threatens to consume the portrait of George Washington at its centre.
Looking towards 2015, the prospect of a US dollar in terminal decline seems unlikely. The dollar has strengthened against most major currencies this year. Within six months it could easily trade higher against the euro and rise to its strongest versus the yen since December 2007.
Behind this call is an expectation that the US will recover faster than other major economies, allowing the Federal Reserve to raise interest rates in mid-2015. This would be the first increase since 2006 and mark the “normalisation” of US monetary policy following the end of quantitative easing – the controversial financial stimulus programme designed to support shaky markets after the global financial crisis.
The European Central Bank meanwhile is contemplating further stimulus that will weaken the euro, while a weak yen forms a central component of Japanese Prime Minister Shinzo Abe’s economic policies.
With US assets in favour, the received wisdom is that international investors will pull money from investments in emerging markets, much as they did in last year’s infamous “taper tantrum” after former Fed chairman Ben Bernanke raised the prospect of an end to stimulus policies.
There is good reason to believe that Asian markets will prove resilient this time
Uncertainty over the exact timing of the shift in US monetary policy and questions surrounding the strength of the global recovery have already triggered the return of market volatility after a prolonged period of calm.
