A lot of economists are predicting a stronger dollar in 2015; an expectation that is leading investors to place some very big bets. But that market strategy could turn out to be a very big error.
The United States is currently the only major economy where growth scenarios are improving. Recently, the US Commerce Department estimated the GDP growth for the third quarter of last year to 5%, that is its highest rate in 11 years.
This was based mostly on personal consumption and business investment – the most stable and persistent components of GDP. Also, the consumer sentiment is at its highest level since 2007, and low oil prices will provide an additional boost by giving US consumers more cash to spend at the mall.
However, the other major economies are stagnant, slowing, or both. Europe’s economic growth is dead in the water, and deflation is not far. In Asia, the Bank of Japan had to increase its securities purchases, which likewise point to the prospect of a weaker yen. Signs of slowing growth in China are leading us to wonder if we will see a weakening of the renminbi’s dollar exchange rate.
Currency forecasting is a crazy game. Exchange-rate movements over horizons as long as a year do not function according to hypothetical models. The behavior of currency markets has repeatedly mystified and sometimes bankrupted experienced investors. With so much currently on the market moving in one or another direction, it is worth considering the consequences if this occurs again in 2015.