Sleepless on the U.S. Dollar

Fund manager Jeremy Grantham, speaking to Barron’s, says he has nightmares over what to do on the U.S. dollar.

What happens to the dollar?
A: The dollar is the thing that keeps me
awake at night. I’ve never seen a bigger consensus than anti-dollar, and
I’ve never been part of such a broad consensus in my investment career. We
take the absolute consensus view that it is hard to imagine that, at some
point out in the future in the next several years, the dollar will not be
materially cheaper than it is today. Having said that, there is a potential
for the dollar to rally viciously by 10% to 15%. That really makes me
sweat, because that would cut across many of our portfolios as painfully as
anything that could happen in the short term. We just don’t know what to do
about it.

The accumulating deficit seems such a profound factor on one hand, yet
this overwhelming consensus makes it hard to be more conservative.
Fundamentally, the dollar in purchasing parity doesn’t seem too expensive.
Two years ago, when the dollar was fundamentally expensive as well as
technically vulnerable, it seemed like a no-brainer to short it, and I’m
happy to say we made a very big bet. We’ve taken in that bet by one-third,
but it is a much more speculative bet now. I sleep much less easily than
two years ago. Now it’s a sweat-it-out bet.

Q: What does the dollar’s fate rest on?
A: I don’t know anyone who sounds
convincing or even convinced of what determines the direction of the
dollar. We are going to spend a lot of our time in the next year studying
currencies. We’ve already been doing it for a few weeks, and one of our
findings, not surprisingly, is that in the long run relative export prices
determine where currencies end up. On that basis, the yen looks cheap
against its 50-year trend and the pound looks expensive.

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