Long-Term FX Strategies in 2008

Abstract

The person responsible for global allocation for a large pension fund had been asked by the board of directors in April 2008 for an assessment on whether she thinks the dollar would appreciate or depreciate over the next five to ten years. She has heard mostly negative views about path of the dollar over the long term, and former Federal Reserve Chairman Alan Greenspan's suggestion that the Gulf States, and others, should de-link from the U.S. dollar as a way to contain inflationary pressures. Currently, the fund is 60% in dollar-based assets and 40% in foreign markets. The dollar's sharp decline against a broad array of currencies, central banks diversifying reserves away from dollars, and some OPEC members invoicing oil-sales currencies in other than dollars are discouraging news. She considers whether to increase the foreign weighting and, because the dollar has overshot its "long-term value," whether it is now more likely to appreciate than depreciate, and finally whether the fund should use the recent dollar pessimism as an opportunity to take profits on its foreign positions and increase the weighting on the now relatively cheap U.S. securities.

Excerpt

UVA-BP-0526

Rev. Feb. 13, 2009

Long-Term FX Strategies IN 2008

Susan Smith, responsible for global asset allocation at a large pension fund, sat in her Crozet, Virginia, home office and pondered the dollar's long-term prospects while taking in the views of the Blue Ridge Mountains. At this point, in April 2008, there were many conflicting views on the likely path of the dollar over the long term, but most of the commentary was very negative. Jim Rogers, chairman of Beeland Interests Inc. and erstwhile colleague of George Soros, recently said he was shifting all his assets out of the dollar and buying Chinese yuan because the Federal Reserve had eroded the value of the U.S. currency. The prospects Rogers suggested were scary: “The U.S. dollar is and has been the world's reserve currency, the world's medium of exchange,” he said. “That's in the process of changing. The pound sterling, which used to be the world's reserve currency, lost 80 percent of its value, top to bottom, as it went through the whole period of losing its status as the world's reserve currency.” In addition, emerging economies all over the world that pegged to the U.S. dollar (or at least limited their currencies' appreciation against the dollar) were facing worrying increases in inflation, in part because of their currency intervention activities. At a recent investment conference in Saudi Arabia, former U.S. Federal Reserve Chairman Alan Greenspan suggested that the Persian Gulf States, and others, should delink from the U.S. dollar as a way to contain inflationary pressures.

. . .

Keywords: Foreign market