Morgan Stanley’s currency strategist Stephen Jen told the FT this week that he is, for the first time in his career, seriously worried about the dollar.
And in his latest note he explains why. Despite the fact that Jen sees the dollar as “grossly undervalued”, it looks set to keep on weakening.
Market psychology regarding the dollar is deteriorating. While we still have a structurally constructive opinion on the dollar and the US economy, we think that, if the situation is mismanaged by the US and European authorities, what has so far been an orderly descent in the dollar could easily degenerate into a more violent event.
Jen argues that unlike back in 2004, when the euro strengthened sharply, the main players pushing the dollar this time around are not hedge funds or real money accounts. Instead, central banks and SWFs from the Middle East and Asia may have been more active than they were back in 2004.
If the ECB and Treasury don’t escalate their rhetoric he argues, the market might see this as ‘benign neglect’ and jump on board the sell-off.
Interesting then that one of those that Jen has his eye on in the future management of this dollar decline, was on Thursday already responding to this call.
Jean-Claude Trichet, ECB president, said recent exchange rate moves had been “undoubtedly sharp and abrupt”, adding that brutal moves were never welcome. The stronger language, similar to that used in 2004, might suggest the ECB believes exchange rates are constraining its room for manoeuvre in setting interest rates.
But Trichet alone won’t do it. And the Fed has yet to show any real interest in currency intervention.
Until the G7 threatens, or indeed conducts, interventions, thinks Jen, the dollar will just keep on weakening, even against the usually feeble Japanese yen.
