...and this is now: an ever-changing economic environment offers even more risks and challenges
For months investors have been worried about the persistent strength of the US dollar. Despite an increasingly gloomy outlook for the US economy, the currency has shown no sign of relinquishing its safe haven status.
So the dollar's recent fall against the euro, despite unexpectedly supportive US data showing slower price rises, a rising house market and a fall in jobless benefits claims, should have been welcomed. But the reality of a weaker dollar has introduced further nervousness into already volatile markets.
In mid-August, when trading is thin, the dollar dropped 4% in a week, sliding against the euro, the yen and sterling. Often a statement from a US Treasury official with the phrases 'strong dollar' and 'US interests' is enough to halt the slide, but this support has not been forthcoming.
The bond markets were the first to realise that economic recovery in the US might not be V-shaped after all, and that a U-shaped growth curve might also be too much to hope for. Now the currency markets have also realised that the US is facing a long, hard slog back to growth and the dollar is under attack.
The euro has long been considered undervalued. Suffering from the flip side of dollar confidence, it softened on bad news and made no gain with good news. Investors have been hoping that a gradual easing of the dollar would allow a sustained appreciation of the euro, and recent signs are positive. But euro recoveries have petered out too many times before to be sure the turnaround is finally here.
The economic outlook for the Eurozone was brighter several months ago before it became clear the region would not escape the US downturn. A strengthening euro might not go down well with struggling exporters, but it would avoid inflation being imported and allow the ECB to cut interest rates.
In the UK, sterling strength has been adding pressure to the manufacturing sector, and interest rate cuts have done little to restrain the currency. A lower pound against the dollar would help the UK by unwinding the trade deficit. The UK economy is effectively split between the buoyant service sector and the rest, but overall is well placed to weather any currency turbulence.
Japanese investors are set for the most testing period if the dollar weakens significantly. Heavily invested in the US bond market, they face losses if they exit, as many are being obliged to do to cover losses in their domestic portfolios. The Japanese equity market, meanwhile, will be squeezed by a rising yen.
The Bank of Japan has belatedly realised the need to ease monetary policy to address persistent deflation. Intervention to support the dollar is increasingly likely, but few are convinced that such action would work, even short term.
Dollar strength was a pressing problem earlier this year. But that was then, and this is now. The changed economic environment is presenting even greater challenges and risks. If the dollar can creep lower, allowing adjustments to be made along the way, fair enough. But extra currency volatility is the last thing investors need right now.
Succeeding co-founder Simon Rogerson
Janus Henderson Global Dividend Index
More than 10 million shares allocated
Long-term strategic holding
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