Tags: Goldman | dollar | euro | Fed

Biggest Danger Investors Face in 2014 is Complacency

Wednesday, 18 Dec 2013 06:38 AM

By Michael Carr

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Goldman Sachs told investors to expect the dollar to weaken in 2014. The Wall Street powerhouse is looking for a decline of about 1.4 percent in the dollar against the euro.

According to Bloomberg, Goldman is breaking from the consensus with this call. Bloomberg's survey of 46 market experts tells investors to expect a gain of 7 percent in the dollar compared with the euro next year.

Analysts at Goldman anticipate only a small move in the dollar because they "expect all major central banks on hold until at least late 2015 — hence, no immediate catalyst."

There appears to be a growing consensus on Wall Street that the Federal Reserve and other central banks around the world will be putting their policies on hold for the next couple of years. This seems to be optimistic and could prove to be a dangerous assumption.

One of the primary tools the Fed uses to implement its policies is the Fed Funds rate. This is the interest rate large financial firms pay to borrow short-term funds from each other. The last time this rate was changed was in December 2008. For five years, the Fed Funds rate has been set at 0 to 0.25 percent.

There was at least one change in the rate every year from 1994 to 2008. Since 1971, 1993 was the only time the Fed went a full year without changing the rate.

In a time of extraordinary economic turbulence, the Fed has placed its policy on hold for an unprecedented amount of time. It seems likely that global events will force the Fed to react after such a long period and markets may react violently when that happens.

Complacency, the belief that 2014 will be just like 2013, could be the most dangerous belief investors can hold right now.

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