LONDON CALLING
Martin Spring
The currency to back now could be the euro. Does that come as a surprise? For the long haul the dollar is a better bet as it reflects the superiority of the United States economy, offering higher risk-adjusted returns and greater breadth of opportunities.
The US is better managed than Europe at governmental and corporate levels, with a stronger entrepreneurial culture, a more flexible labour market, less regulation and lower taxes.
Currency experts favoured the euro over the dollar from its launch in January 1999 and remained consistently wrong in their forecasts as its exchange rate slid from $1,17 to 84c.
Their view was largely based on pessimism about the dollar because of the US’s foreign trade deficit, running at about a $1-billion a day. They expected a dollar crisis, which would send international capital fleeing to the only credible alternative store of value the new currency based on the world’s second-largest regional economy pushing up its value in dollar terms.
That didn’t happen because so much capital has been pouring into the US. European and Asian investors sold their currencies to buy dollars, supporting and lifting the greenback.
The outflow from Europe has had four important components:
l “Direct” investment, or takeovers of US firms by Europe-based multinationals.
l Purchases of US-listed shares and bonds.
l Loans to US borrowers by European banks and bond issues in the euro-zone by US companies and federal agencies.
l Conversion of “black” and “grey” banknote holdings of European currencies into dollars to avoid disclosure to bank officials when those currencies have to be exchanged for euros early next year. However, this month’s 4% rally in the euro in dollar terms could be the harbinger of better times for the currency.
With pessimism about prospects for the world economy spreading, corporate earnings everywhere under pressure, and the attractions of “new economy” businesses in the US having evaporated, Europe-based multinationals are losing their enthusiasm for acquisitions in the US.
Although there is a smaller loss in US shares than in European ones, the heavy sales by corporate insiders suggest that those in the best position to know anticipate some ugly earnings shocks in the US in the near future.
US bonds no longer offer higher yields than comparable European securities.
As for all those black/grey market marks and pesetas that have been sloshing around, I suspect that by now most of the conversions into dollars and other assets hve been completed. We can look ahead to unwinding of positions sale of dollars for conversion into euro banknotes at the start of next year.
What this all amounts to is that the US has lost, or is losing, its short-term margins of advantage over Europe.
Without “momentum,” or a propensity for US currency deposits and securities to continue increasing in value in euro terms, the flood of capital westwards across the Atlantic must slacken.
@LETTERS