There are times as an investor when what happens to currencies matters a good deal and other times when it does not. We certainly seem to be living through one of those phases when currencies suddenly seem to matter a huge amount to investors, politicians and central bankers. It is no accident that a fair part of President George Bush's present visit to Asia is going to be taken up with trying to persuade the Chinese to let their currency find its proper value, rather than being artificially pegged, as it is now, at what the Americans think is far too low a rate.
The dollar's decline has been gradual but relentless since the slide against most other currencies started two years ago, its. I recall the New York economist, Peter Bernstein, saying a couple of years ago that the dollar was "an accident waiting to happen", and it is hard to find any serious investor who does not think the depreciation of the dollar will continue for a good while yet.
Although day-to-day currency movements are next to impossible to predict with confidence, most longer-term trends in exchange rates tend to last for years rather than months. So for once, even for a contrarian, it is not difficult to persuade oneself that consensus opinion must be right about the odds on continued dollar weakness. I have yet to find a serious investment manager or strategist who does not think it is by far the most probable outcome, at least until the voting polls open in the United States in autumn next year.
The reason for the dollar's recent weakness is not hard to find. The massive monetary stimulus that has been given to the US economy in the shape of 13 successive interest rate cuts since the terrorist attacks of 11 September, 2001, has finally begun to have its desired effect. The US economy and corporate profits have picked up more strongly than many observers expected. This has had the effect, inter alia, of sucking in huge amounts of imports.
The resulting ballooning current account deficit, which is now 4.5 per cent of GDP and well on its way higher, is being financed only as a result of massive capital flows back to the States, many of them coming ironically (though not surprisingly) from the Asian region, including China.
As the economists at HSBC said at their annual global investment seminar this week, as much as 40 per cent of this capital is coming from Asian central banks, which have been buying Government bonds in the US as if there were no tomorrow, in the hope of keeping their currency competitive.
Most important, perhaps, it does appear the Bush Administration, aided and abetted by the Federal Reserve, has officially abandoned the strong dollar policy of the recent past and is happy to see the currency slide further as a matter of policy. Indeed, you could argue that this is probably the only way, on presentent trends, that President Bush can hope to get himself re-elected. The Baghdad effect is clearly fading fast, while the economy continues to reap the painful consequences of the bubble that President Bill Clinton so prospered from before he escaped from office, one step ahead of the fallout.
In particular, the Republicans are politically vulnerable to the charge that they are letting cheap Chinese exports destroy jobs in manufacturing and agriculture, which just happen to be two of the most prominent and powerful domestic lobbies in the US.
HSBC believes George Bush has the lonely distinction of being the only US President in history whose period in office has been marked every single month by a fall in the number of people in manufacturing employment. In the circumstances, it is no wonder his poll ratings are starting to fall. Whichever way you dress it up, his economic record is not going to look good when polling day comes round, so desperate measures are called for.
If the weak dollar is here to stay for a couple of years, say, as a matter of economic and political necessity, where does that leave investors? The smart money is all flooding out of dollars, but even the savviest Americans are finding it hard to find a good place to put their money. Jim Rogers, the one-time partner of George Soros, is also finding it hard to answer that question.
"I am constantly searching for a sound currency in which to keep my investments, but have yet to find one that is satisfactory," he told me this week, stopping over in London to promote his new round-the-world travelogue book, Adventure Capitalist.
"The US dollar is fundamentally flawed and the euro has problems, as does the yen. I own several currencies around the world and have no confidence in any of them."
At present, Mr Rogers, like many others, has a deal of money in the euro, but only as the best of a bad lot. The European Central Bank's masochistic interest rate policy is helping to see to that, albeit at a heavy cost in terms of economic slowdown and potential deflation across many parts of Europe.
Sterling is caught somewhere uneasily in the middle. Our cheap money policy has got the economy going again, but with potentially similar consequences for the currency, implying, says HSBC's Stephen King, that it may maintain rough parity against the dollar, but weaken against the euro.
Who knows how the end game will play out? What is clear is that the imbalances in the global economic system, coupled with continued depreciation of the currency in which 60 per cent of the world's currency reserves are held, adds a new layer of complication to anyone who wants to invest abroad.
It also helps to explain why gold is still rising, and why many smart investors still think that, notwithstanding this year's impressive rise in the stock market (which may continue to the end of the year), the secular bear market in leading stock markets is not yet over.
Asian stock markets, which are much cheaper on valuation grounds, still look a good bet, but cannot entirely escape the currency risk. Hong Kong's Hang Seng index went through the roof the last time the dollar was devalued, after the Plaza agreement in 1985.
Mr Rogers also reckons that commodities have a long way still to go, despite their strong performance recently. In fact, we could be seeing the start of a new bull market in commodities which could run for many years.Reuse content