The dollar is poised to break out, gaining strength over the next year, according to a Reuters poll released earlier this week. The implication is that the greenback is being viewed, and will be viewed, as a safe place for investors (and businesses) to park their money (regardless of currency) with the U.S.
The dollar’s rise would buck traditional pressures that would be seen in the event that the Fed would not raise rates – which is the case right now, and is predicated on events taking shape beyond the U.S. The fact that other central banks are likely to easy their monetary policies in an effort to stave off widespread recession(s) means that retail and institutional investors alike will be chasing some safety.
One spark lighting the movement toward safety has been the shock of the Brexit vote that took place last month. Sterling is at a multi-decade low, with fears that the all-but-foregone conclusion that Britain will leave the E.U. stoking worries about trade, and possibly the exit of other nations from the E.U. The result has been that the dollar and gold have rallied. Reuters reported that the euro could fall against the dollar to as low as $1.07, down from about $1.11 level recently seen. The rage of estimates for the pound is even more dire, with analysts expecting the current $1.31 level to weaken to as much as $1.57 within a year.
There’s another wrinkle or fly in the ointment. No less an investment powerhouse than Goldman Sachs has estimated that U.S. markets could sell off in a range of between 5 percent to 10 percent within the next few months. The valuations for stocks are above long-term ranges, as has been noted among analysts, with the 16x forward price to earnings multiple coming in significantly above the 14x long-term average. Stocks, then, are pricing in a lot of optimism, and might it be the case that such optimism may be misplaced amid global pressures? Earnings growth has been slowing, too, and Goldman noted that buybacks may not be enough to support earnings. Though the Goldman analysts expect a rebound, the potential for short-term pain abounds. If stocks fall, it stands to reason that the dollar would continue to be viewed as a safe haven against all manner of turbulence.
A stronger dollar may have implications for payments firms – especially those operating cross-border – where consumers will see their buying power diminished. If that continues to happen, and recessions start to loom outside the U.S., then the credit cards and PayPal and any manner of payment conduits may see tough times ahead.
And everyone thought that bitcoin was the safe haven in a crisis. Tsk, tsk.