The US dollar is extremely overvalued and if history is any guide it is poised for a substantial multi-year fall.
The value of the US dollar, shown by its real exchange rate in the chart below, has been remarkably cyclical over the past fifty years. Since the end of the Second World War, there have been three previous instances of extreme dollar overvaluation: the 1970s, the mid 1980s and the early 2000s. In the 1970s, the overvaluation was caused by high inflation within a fixed exchange rate regime (“Bretton Woods”); in the mid-1980s, the overvaluation was caused by Fed policy under chairman Paul Volcker that saw rates rise to double digits to squeeze inflation out of the system (“Volcker Shock”); and in the early 2000s the overvaluation was driven by the tech boom drawing in capital to the US (“Productivity Miracle”).
One thing that all three of these prior episodes of dollar overvaluation have in common is that they did not last. In each case, the US dollar, as measured by its trade-weighted exchange rate against a basket of its peers, saw a massive depreciation over a multi-year period. These historical precedents suggest that the US dollar is poised for a substantial, multi-year fall. We believe the current strength of the US dollar makes a clear case for US dollar unhedged global fixed income mandates, especially when considered against the backdrop of rising yields, divergence in value between US and international credit markets, and the build-up of recessionary risks.
Disclosures
The value of fixed income instruments is affected by interest rates, inflation, and credit ratings. Although, investments in emerging markets offer a higher yield, they involve a greater risk of loss and higher volatility than investments in developed markets. Higher yielding bonds tend to carry a greater risk of loss due to issuer default.
Views expressed were current as of the date indicated, are subject to change, and may not reflect current views.
Views should not be considered a recommendation to buy, hold or sell any security and should not be relied on as research or investment advice.
The information was obtained from sources we believe to be reliable, but its accuracy is not guaranteed and it may be incomplete or condensed. All information is subject to change without notice. This document may include forward-looking statements. All statements other than statements of historical facts are forward- looking statements (including words such as “believe,” “estimate,”
“anticipate,” “may,” “will,” “should,” “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those reflected in such forward-looking statements.
This document is an internal research paper. The material is for informational purposes only and is not an offer or solicitation with respect to any securities. Any offer of securities can only be made by written offering materials, which are available solely upon request, on an exclusively private basis and only to qualified financially sophisticated investors.
Past performance is not a guarantee of future results. An investment involves the risk of loss. The investment return and value of investments will fluctuate. There can be no assurance that the investment objectives of the strategy will be achieved.
This document is solely owned by and the intellectual property of Mondrian Investment Partners Limited. It may not be reproduced either in whole, or in part, without the written permission of Mondrian Investment Partners Limited.
Mondrian Investment Partners Limited is authorized and regulated by the Financial Conduct Authority.
Mondrian Investment Partners Limited is registered as an Investment Adviser with the Securities and Exchange Commission (registration does not imply any level of skills or training).