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Is a strengthening dollar the killer currency call for 2014?

by Danielle Levy on Dec 13, 2013 at 13:22

If the US dollar does strengthen next year and emerging market debt (EMD) and currencies sell off, Coombs said that if spreads on EMD reach 400 basis points it would represent an attractive entry point for his multi-asset funds. He currently has a zero allocation to EMD.

Bill McQuaker, head of multi-manager at Henderson Global Investors, expects the dollar to strengthen for multiple reasons, not least a normalisation in interest rates.

Other supporting factors include the US’s diminishing appetite for oil imports, which is dollar positive, alongside an ageing population’s increased spend on services rather than goods, which are often imported.

‘The other factor is that the US has got a significant manufacturing base and is now globally competitive,’ he said. ‘It does not need a weaker dollar from here.’

Although those that tipped a stronger dollar this year have largely been caught out, he points out that once the dollar does start to move it could move rapidly. The Australian dollar’s 15% decline against sterling this year is perhaps a testimony to this, he added.

Oliver Tucker, a fund of funds manager at Sarasin & Partners, says the case for a strengthening dollar makes sense in 2014, but he is awaiting further clarity once markets survive the debt ceiling and tapering.

‘Currency is an asset class that can often be very volatile and can trend for a long time. If you miss out on that trend or action, your total returns can be dramatically different,’ he said.

‘We have seen a period in time where the way that currencies have behaved has not been as dramatic as it has been in the past because of financial repression and quantitative easing policies.

‘Should currencies behave in a different fashion as policies start to diverge? It is entirely possible that we will see new trends emerge.’

Tucker, like Coombs, says emerging markets could come onto the radar if valuations continue to fall, highlighting the fact that yields on emerging market corporate bonds are approaching their 2009 highs.

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