Biden’s dollar will be weaker than US cash under Trump. Or so is at least the majority of the opinions of the investor community: the dollar, which has already lost some of its luster over the past few weeks, will fall further. The irony is that this is what Donald Trump wanted. True, his positions were slightly ambivalent on this, but he ultimately took a solid stance on the Fed’s policies because they supported the currency. So it looks like Joe Biden will get what his predecessor didn’t. Why?
Well, it must first be said that this is not indicative of any lack of confidence in his nominee for Treasury Secretary, Janet Yellen, or indeed the rest of his economic team. Her appointment, in particular, was warmly welcomed both within the United States and abroad. Rather, this is one of the major global shifts in investor sentiment that occur from time to time.
Still early, but there are at least six factors supporting this trend.
The first factor, is the decline of fear. The dollar is always a safe haven in times of turmoil, and the world has known enough turmoil. For now, the prospect of a strong global recovery next year stands out, and the debate is limited to the speed of the recovery. Therefore funds that have resorted to the dollar will be invested in other areas, including emerging markets.
Second, the yield margin between US government debt and its European counterpart is expected to shrink. Both the US and the eurozone will be pursuing very lenient fiscal policies and everyone will be looking for indicators [of fiscal policy trends] in Janet Yellen’s testimony to Congress and Christine Lagarde’s position at the European Central Bank’s meeting on future policies. US yields will remain higher than in Germany. The interest rate on 10-year US Treasury bonds is just under one percent, which is not much. But similar German bonds offer a [interest rate] minus 0.6 percent, which is a ridiculous return in the eyes of most investors who can choose. But with the global economic recovery, investors seem to believe, rightly or improperly, that the decline of long interest rates European Commission will report and that European investments will become relatively more attractive.
Thirdly, there is a shift in investment from the shares of “developing” companies to the shares of “value”companies. The stocks of developing ones-such as Apple, Microsoft, Amazon and others – are making impressive gains, but they are now very expensive. In recent weeks, the mood has seemed to shift and people see better opportunities in the stocks of less glamorous companies that produce things like household products, such as Unilever, and pharmaceuticals, such as Astra Zenica. Even if airlines, banks and oil companies back to prominence.
The idea is that if you want to invest in the high-tech sector, you have to buy shares of American companies. There are no similar companies to Apple and Facebook in Europe. Of course, there are shares of value companies in the United States as well, but the net effect of the shift to value companies is to move money out of the United States – and away from the dollar.
Fourth, Europe looks more attractive in general form. This week it may seem reprehensible, in light of the maneuvers over the trade relationship between the EU and its former member state, the United Kingdom, and the dispute over the EU’s budget between it and the two extraterritorial member states, Poland and Hungary. But global investors are looking beyond that, for a solid European economy over the next two or three years. They don’t simply prefer the euro to the dollar, but rather what they expect to be prosperous European Mini at least.
They also prefer Asia, this fifth factor. The pandemic was “better” [less burdensome] in Asia, compared to Europe or the United States, meaning that Asian countries caught the virus in better shape, so their economic decline was less and their economic recovery faster. Money rushes to interesting markets as investors fear they will miss the train.
Obviously, a lot of money is going to mainland China, where the only big economy that has grown this year, but it also flows to South Korea and Hong Kong.
Finally, there is the same. If we could anticipate fluctuations in the fashion [waves] of investment, we would all be rich. But we can’t. However, cunning investors can identify a fashion trend early on and follow it until it changes direction. This is called Momentum Investment. If the momentum is money accumulation in the United States, you should. If a large number of people are wondering if that trend is coming to an end, as it is now, don’t ask why – just follow them.
The end result of all this will not be a collapse of the dollar, or I can not at least see it. It would be a rebalancing of the global financial situation with a return to normalcy. A fairly low dollar will support the US economy, Donald Trump said. To the extent that the low dollar helps to re-Save American jobs, it will also please Joe Biden.