John Taylor, manager of the world’s largest currency hedge fund, FX Concepts, expects the dollar to rebound next year, despite the risk of massive inflation ahead.
The worldwide recession and financial crisis have turned the greenback into a safe haven for many investors.
The dollar has gained about 16 percent against a basket of major currencies (the dollar index), rising about 18 percent versus the euro since August.
Based on FX Concepts’ cycles analysis, Taylor told a Reuters investment conference that the dollar may hit a peak at the end of December and then slide through late January or early February.
After that, “We expect a further high in the dollar by mid-2009,” Taylor says.
He expects the yen to strengthen along with the dollar. As part of their effort to deleverage, global investors have been unwinding carry trades, in which they had sold yen to buy higher-yielding currencies.
Taylor raises the possibility that the Bank of Japan, fighting a domestic recession, may intervene if the dollar drops below 88 yen.
That level is “significant because it corresponds to 10 percent of the record lows hit in 1995 around 80 yen,” Taylor says.
Other big names at the Reuters conference, including Wall Street economist Henry Kaufman, agreed with Taylor about the dollar’s strength.
“In times of recessions, where do you go?” he asks.
“You move to the most marketable securities in the world. The dollar will remain a key reserve currency.”
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