First with Financial Comment from Arabia

Hedge funds see dollar parity for the euro

with one comment

How long before one dollar is equal to one euro? Yet that is where the two currencies started life at the birth of the euro, and it was the dollar that first gained ground against the euro, not the other way around.

According to a report in the Wall Street Journal last Friday hedge fund managers are now betting on a return to euro-dollar parity, or so a fly-on-the-wall at a recent lunch of star hedge fund managers apparently observed.

Dollar top

The so-called ‘idea dinner’ managers are responding to the recent change in fortunes for the US dollar which seems to have topped out at $1.50, the very moment of maximum negative sentiment and amid predictions that the dollar’s days as a reserve currency were over.

Part of the reason for the resurgent dollar is the Greek debt crisis in the European Union, and fears about large debt levels in a wide group of EU member states comprising Portugal, Ireland, Italy, Spain, Britain and even France and Belgium on some measures.

But what could well compound the dollar’s rise is another big sell-off in global financial markets as the reality of a double-dip becomes apparent in the world economy. US economic data over the past couple of weeks has been largely negative.

For as stock markets sell off there will be a commensurate rise in demand for the US dollar and US treasuries as a safe haven, and as a natural consequence of the sale of any asset for cash.

Hedge fund managers are merely identifying the latest trend. The trend is then their new best friend, and they place huge amounts of other people’s money and borrowed money on this trend.

Should they be right then they collect huge success fees. If they are wrong then their clients lose money. This is how hedge fund managers become billionaires, and their clients win and lose.

Investment lesson

However, there is an important lesson for all investors in this perceptive
identification of the new dollar trend. Namely that keeping cash in euros or for that matter pounds and many other currencies is no longer a good idea.

Investors in the UAE should take advantage of local deposits in the dirham which has a fixed peg to the US dollar and higher interest rates.

On the other hand, the trend is only your friend until it is not. The US dollar could fall again very quickly and the bond market crash, so stay alert.


Written by Peter Cooper

March 1, 2010 at 8:49 am

One Response

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  1. In this time of escalating uncertainty in FX it looks like the GCC “Khaliji” is falling into doubt, per a report from Jadwa Investments in Riyadh last week.

    “The optimal peg (for the single GCC currency) is a currency basket made of 45% U.S. dollar, 30% euro, 20% Japanese yen and 5% British pound,” DIFCA Chief Economist Nasser Saidi said in 2008.

    That weighting could lead to de facto devaluation of the GCC currency were Euro and Sterling to continue experiencing turmoil. It’s probably in the GCC’s best interest to appreciate the hypothetical Khaliji against all major currencies.

    Were the GCC to pull this off successfully, an appreciating currency could attract capital inflows and alleviate the current pressure they (esp. the Saudis) feel to keep the oil price so high through the artificial supply constraint of OPEC production quotas.

    By acceding to the OPEC hawks (Chavez, Ahmadinejad, Correa) and keeping the current $75 target, achieved through quotas, the Saudis are unnecessarily harming the world economy as well as aiding the GCC’s competitors who desperately need higher oil prices.

    The GCC could effectively get the same “price” for the oil were they to reverse the Saudi cuts (selling more oil) while overseeing a managed appreciation of their currency.

    This is only possible because the GCC is not dependent on floating international debt to pay for government expenditures. GCC should not wait for this opportunity to disappear.


    March 1, 2010 at 9:49 am

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