The world appears to be awash in US dollars, thanks to the US Federal Reserve’s aggressively loose money supply. Paradoxically, however, global capital markets may be experiencing a gradual tightening of access to greenbacks, according to independent economist Peter Redward.
This suggests to him that the US dollar is likely to appreciate against other major currencies during the next 18 months or more.
The New Zealand-based analyst (he previously served as head of emerging Asia research at Barclays in Singapore) said: “The rest of the world needs dollars to conduct international trade and capital markets activity.”
The source of dollars is from the US current-account deficit, and from US corporations and banks lending dollars. The size of America’s trade deficit in nominal terms may be growing, but it’s actually shrinking when expressed in terms of the GDP of the rest of the world.
“The size of the US current-account deficit is actually the same as the early 1990s,” Redward said. “Relative to the rest of the world, the US is not exporting dollars into global markets as it used to.”
Even if the US trade deficit widens further, America’s declining share of global output is leading to what Redward terms a “dollar squeeze” in global capital markets.
“It’s occurring gradually,” he said. “Most people are missing this.”
Moreover, America’s trade deficit is actually narrowing. Its balance of payments is improving thanks to a domestic increase in oil production; to trends in e-commerce; to more international tourism to the US; to falling foreign remittances from the US; and from US consumers minding their pocketbooks.
This means a stronger dollar. Redward says other trends also support the dollar, including interest rate differentials, as other central banks engage in balance-sheet expansion, and falling commodity prices. “Investors are steadily increasing their long-dollar positioning,” Redward said. “This is going to have an impact in global capital markets.”
Redward spoke last week at FinanceAsia affiliate title AsianInvestor’s institutional investor event in Seoul.