Discussion 1 - FIN6644 global financial strategy

Investors Fear Inflation Impact On Dollar Rally Davies, Paul J; Ostroff, Caitlin . Wall Street Journal , Eastern edition; New York, N.Y. [New York, N.Y]19

Mar 2021: B.1.

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FULL TEXT The U.S.'s economic prospects look brighter than those of many other countries -- and that has driven an

unexpected dollar rally this year.

Investors thought the greenback would weaken during a coordinated global rebound from Covid-19 lockdowns.

Instead, the U.S. stands apart from the rest.

The flip side of this exceptionalism is a growing fear of higher inflation that could eventually reverse the dollar's

fortunes, according to some investors.

The dollar has risen nearly 2.5% against the currencies of the U.S.'s major trading partners since early January.

Some had predicted declines of up to 20% in 2021.

The big difference is the passage by Congress of a $1.9 trillion spending package, which is delivering $1,400

checks to many American households.

However, the same U.S. relief bill is also stoking inflation fears. The money will hit the economy just as a wave of

pent-up demand and cash saved by some households during lockdowns could be unleashed. Secondarily, it will

add to America's budget deficit -- a measure of how much government spending exceeds revenue from things like

taxes -- and debt burden.

"Higher inflation in any country is typically currency negative," said Peter Boockvar, chief investment officer at

Bleakley Advisory Group. He added that the dollar will also be challenged by rising deficits.

Mr. Boockvar has increased investments in commodities and moved money into Asian emerging-market stocks in

a bet that the dollar will weaken and inflation will rise.

Fears of rampant inflation have gone unfulfilled for years. The U.S. has had low and stable inflation for nearly three

decades.

For many investors, the scale of the government spending is what makes this time different. Even a left-leaning

economist like former Treasury Secretary Lawrence Summers has raised concerns that the spending risks

provoking sharp inflation.

"This latest relief bill is really quite extraordinary: We've become numb, almost, to these very large numbers," said

William Dinning, chief investment officer at Waverton Investment Management.

He doesn't expect "some sort of existential crisis for the dollar." Mr. Dinning is buying hedges that pay out when

U.S. stock-market volatility jumps, rather than taking outright positions against the dollar.

Treasury investors are betting that inflation will jump in the near term and then fade. One theory why inflation

hasn't stuck in recent decades has to do with a lack of wage bargaining power in labor markets and global free

trade. Advances in technology have also held down prices globally.

Some of these disinflationary forces are losing their power or going into reverse, according to Dario Perkins, a

global macroeconomist at TS Lombard, though not quickly. "These are things that change very slowly over time,"

he said.

Investors who are wary about inflation returning are looking at the scale of spending and borrowing combined. The

budget deficit hit 14.9% of gross domestic product in 2020, the highest level since 1945. It was forecast to fall to

about 10% in 2021 by the Congressional Budget Office, but that excludes the Covid-19 aid package.

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Some investors are troubled by the amount of Treasurys being bought by the Federal Reserve, which creates

dollars to do this. They see its recent bond buying as different from the quantitative-easing programs since the

2008 crisis.

Chris Brightman, chief investment officer of Research Affiliates, said he believes the current Fed bond buying is

turning into an experiment in debt monetization, which is when the central bank prints money to directly fund a

government's spending.

"The Treasury is spending more than it collects in taxes, it issues debt to cover the difference and the Fed buys a

goodly amount of that debt," he said.

Between 2010 and 2014, the Fed bought about 40% of the extra debt issued by the U.S. government and doubled

its share of Treasury ownership to 18.6%, according to the Securities Industry and Financial Markets Association, a

trade body. When government borrowing grew sharply last year, the Fed bought more than 55% of the new debt

and its ownership share rose from 13% to 22%.

Mr. Brightman said he thinks printing money to fund direct cash handouts could end with a loss of U.S. fiscal

discipline: Once the government decides that the Fed can effectively send checks directly to people's bank

accounts, it becomes hard to stop.

That would invite high and volatile inflation: Bad news for stocks, bonds and the dollar, he said. One response is to

borrow in dollars and invest in real assets and resources companies, he added.

At the same time, the U.S. current-account deficit is growing as spending on imports is increasing relative to

income from exports. A growing trade deficit means the U.S. needs foreign exporters to recycle dollars back into

America through investing or lending. Twin trade and budget deficits can weaken an economy and leave its

currency vulnerable.

However, when it comes to funding trade and budget deficits, the U.S. has a big advantage because the dollar is

the world's most commonly used currency. That generates greater demand for Treasurys than for other countries'

debt.

But demand from private investors, including foreign buyers, appears to have weakened recently. Foreign investors

are still the biggest owners of U.S. public debt, but their pace of buying slowed last year and their collective market

share fell from 35% to less than 30%.

Treasury yields have risen sharply this year as selling has pushed down prices, but yields are still at historically low

levels.

"High debts and deficits don't matter too much when interest rates and yields are low," said Mark Dowding, chief

investment officer at BlueBay Asset Management.

U.S. interest costs as a percentage of GDP are very low, particularly if you consider only the cost of servicing the

debt that isn't owned by the Fed.

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Credit: By Paul J. Davies and Caitlin Ostroff DETAILS

Subject: Currency; Investments; American dollar; Securities industry; Treasuries; Debt

restructuring; Government spending; Volatility; International trade; Gross Domestic

Product--GDP; Financial executives; Coronaviruses; Budget deficits; COVID-19

Business indexing term: Subject: Currency American dollar Securities industry Treasuries Debt restructuring

Volatility International trade Gross Domestic Product--GDP Budget deficits

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Location: United States--US

Publication title: Wall Street Journal, Eastern edition; New York, N.Y.

First page: B.1

Publication year: 2021

Publication date: Mar 19, 2021

Publisher: Dow Jones &Company Inc

Place of publication: New York, N.Y.

Country of publication: United States, New York, N.Y.

Publication subject: Business And Economics--Banking And Finance

ISSN: 00999660

Source type: Newspapers

Language of publication: English

Document type: News

ProQuest document ID: 2502600860

Document URL: http://ezproxy.fiu.edu/login?url=https://www.proquest.com/newspapers/investors-

fear-inflation-impact-on-dollar-rally/docview/2502600860/se-2?accountid=10901

Copyright: Copyright 2021 Dow Jones &Company, Inc. All Rights Reserved.

Last updated: 2021-03-19

Database: ABI/INFORM Collection,U.S. Major Dailies

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Could the Asian Crises Repeat? Flint, Robert . Wall Street Journal , Eastern edition; New York, N.Y. [New York, N.Y]03 July 2007: C.12.

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ABSTRACT (ABSTRACT) "In the near future, the prospects of economic growth in the U.S. and the world, global payments imbalance and

the pace of unwinding global liquidity pose risks and challenges to the Asian economic outlook," Mr. [Haruhiko

Kuroda] said at the forum.

When an event, such as the float of the Thai baht, touches off a panic, investors stampede for the exit doors all at

once, Mr. [Walter Gerasimowicz] explained. This "raises the price of liquidity," which tends to spread the contagion

further afield as investors seek to escape to safer assets.

"As the global economy is more connected than it has been for most of the last century, and financial regulations

are often lax, unenforceable or changing in so many key spots, it's likely that a similar contagion will hit us

sometime in the future," said Mr. [Usha Haley], author of the book, "Asian Post-Crisis Management." FULL TEXT Ten years after the beginning of the Asian financial crises, everyone is still pondering whether it can happen again.

The float of the Thai baht on July 2, 1997, is widely considered the start of the Asian crises. No one dreamed at

that time that troubles for a regional Asian currency would touch off a chain of events that would severely shake

the economies of a string of neighboring countries and send ripples world-wide.

The contagion that began in Thailand spread to Indonesia, Malaysia, South Korea, the Philippines and to a lesser

degree even affected Hong Kong and Singapore. By the end of 1998, the acute phase of the crises had passed, but

the effects were felt for several more years as these countries grappled with recession.

Ten years down the road, academics and government officials can point to various reasons for the turmoil --

financial markets that were inadequately regulated or insufficiently developed; fixed foreign-exchange rate

regimes; unbalanced industrial structures; substantial short-term external debt; and heavy speculation by

international and domestic investors, among others.

The best guess seems to be that while the conditions that led to the Asian crises in the 1997-98 are unlikely to

arise again, there is always the possibility that another is just around the corner, waiting for a fresh spark.

Asia has moved forward after the 1997 financial crisis, but surging capital flows still pose a risk and require closer

economic cooperation, the Asian Development Bank and government economic managers said at a forum in

Manila to mark the 10th anniversary of the crisis.

ADB President Haruhiko Kuroda said the region has the potential for more bouts of financial market volatility as

capital flows surge significantly in line with increased global liquidity.

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"In the near future, the prospects of economic growth in the U.S. and the world, global payments imbalance and

the pace of unwinding global liquidity pose risks and challenges to the Asian economic outlook," Mr. Kuroda said

at the forum.

One major factor in the string of crises 10 years ago was the "flight to liquidity," said Walter Gerasimowicz,

chairman and chief executive of New York-based Meditron Asset Management.

When an event, such as the float of the Thai baht, touches off a panic, investors stampede for the exit doors all at

once, Mr. Gerasimowicz explained. This "raises the price of liquidity," which tends to spread the contagion further

afield as investors seek to escape to safer assets.

In such circumstances, "there is potential for herd mentality," he noted. That basic scenario could rise again,

although with entirely different factors igniting the rush, he said.

The Asian financial crisis was not an isolated event," commented Usha Haley, professor of international business

and director of the Global Business Center at the University of New Haven, Conn.

"As the global economy is more connected than it has been for most of the last century, and financial regulations

are often lax, unenforceable or changing in so many key spots, it's likely that a similar contagion will hit us

sometime in the future," said Mr. Haley, author of the book, "Asian Post-Crisis Management."

Dollar Sells Off;

Euro Ends Near a High

The dollar sold off despite a slightly stronger-than-expected report on the U.S. manufacturing sector, with the euro

at one point less than half a cent away from its all-time high against the dollar.

Late in New York, the euro was trading at $1.3622, up from $1.3535 late Friday, while the dollar was at 122.32 yen

from 123.12 yen. The euro was at 166.75 yen compared with 166.46 yen. The dollar was at 1.2107 Swiss francs

from 1.2214 francs, while the pound traded at $2.0169 from $2.0081.

---

Corrections &Amplifications

Ms. Usha Haley is professor of international business and director of the Global Business Center at the University

of New Haven, Conn. The Currencies Trading article in Tuesday's Money &Investing section misidentified her as

Mr. Haley.

(WSJ July 5, 2007)

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Subject: History; Economic policy; Economic crisis; American dollar; Regulation of financial

institutions

Business indexing term: Subject: Economic policy Economic crisis American dollar Regulation of financial

institutions; Industry: 92611 : Administration of General Economic Programs 92615 :

Regulation, Licensing, and Inspection of Miscellaneous Commercial Sectors

Location: Asia

Classification: 9179: Asia &the Pacific; 1110: Economic conditions &forecasts; 1120: Economic

policy &planning; 92611: Administration of General Economic Programs; 92615:

Regulation, Licensing, and Inspection of Miscellaneous Commercial Sectors

Publication title: Wall Street Journal, Eastern edition; New York, N.Y.

Pages: C.12

Publication year: 2007

Publication date: Jul 3, 2007

column: Currency Trading

Publisher: Dow Jones &Company Inc

Place of publication: New York, N.Y.

Country of publication: United States, New York, N.Y.

Publication subject: Business And Economics--Banking And Finance

ISSN: 00999660

Source type: Newspapers

Language of publication: English

Document type: News

ProQuest document ID: 399026524

Document URL: http://ezproxy.fiu.edu/login?url=https://www.proquest.com/newspapers/could-

asian-crises-repeat/docview/399026524/se-2?accountid=10901

Copyright: (c) 2007 Dow Jones &Company, Inc. Reproduced with permission of copyright owner.

Further reproduction or distribution is prohibited without permission.

Last updated: 2020-11-20

Database: ABI/INFORM Collection,U.S. Major Dailies

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