UBS’ George Magnus: King Dollar Redux

Friday, 01 Mar 2013 08:25 AM

By John Morgan

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Forget all that talk from doomsayers and perma-bears about the looming collapse of the dollar, there is a bull market ahead, George Magnus, senior economic adviser at UBS, says in a research note titled “A third U.S. dollar bull market 2008-2015?”

Magnus maintains conditions are ripe for another extended ascent for the greenback. He argues the deficit is actually shrinking as a percentage of gross domestic product, jobs are increasing, domestic energy production is mushrooming, the housing market looks better and an exit awaits from quantitative easing in 2014, The Economist reported.

However, Financial Times’ David Keohane says that a resurgent dollar would actually be bad for emerging markets.

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“It doesn’t take too much of a backward look to spot the dangers,” Keohane writes. “The first dollar bull market in the 1980s had a detrimental effect on Latin America, and those associated with the second bull market in the 1990s contributed to the Asian crisis and was triggered by the dollar’s appreciation against the yen.”

But Magnus does not believe dollar appreciation on emerging markets would lead to financial instability and interruptions to the growth.

“Perhaps the most confident conclusion is that the upshot of these developments should see a puncturing of the commodity cycle, at least as far as industrials and metals are concerned. This might prove to be a blessing for most emerging markets, since the majority are net oil and commodity importers,” he writes in his note.

Magnus’ caveat is that lower commodity prices resulting from a rise in the U.S. dollar alone would be good for the global economy. However, a strong dollar, based on higher U.S. real interest rates could be a negative for other nations, he acknowledges.

Economist columnist Buttonwood predicts that the current global financial crisis will end in a realignment of the world’s currency system.

Buttonwood notes that the “trigger for a realignment in my view lies in the U.S./China axis; there is something unstable about one rival superpower being such a great creditor of its rival.

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