Currency funds manager Axel Merk warns the die of the dollar’s long-term decline has been cast, suggesting investors recognizing we’ve crossed this currency Rubicon may find salvation in a widely “misunderstood” euro.
In a recent commentary, the chief investment officer of Merk Investments, which managers four currency-based funds, offers a variety of unflattering comparisons between U.S. monetary and fiscal management and that of the oft-maligned eurozone.
The euro, he notes, bested the dollar two years ago in the midst of the eurozone crisis, and last year as well.
U.S. monetary policy, with its emphasis on the purchase of Treasury and mortgage-backed securities, has kept rates low.
But rising rates — to be expected as the Federal Reserve tapers its bond purchases — have been associated with a weakening dollar, Merk says.
A greater problem, however, is our inability to afford positive real interest rates.
“The biggest threat we face might be economic growth,” her writes, “because a stronger economy may warrant higher interest rates in order to contain rising inflationary pressures.”
And if rates returned to their historic average of 5.6% between 1973 and 2012, the ensuing $1.2 trillion in interest expense (from our current $220 billion) would overwhelm the federal budget.
The currency investor sharply criticized what he sees as the Yellen Fed’s abandonment of its price stability mandate, arguing the Fed actually wants inflation “to push up home prices … and to dilute the value of government debt.” Such a policy is a further blow to the long-term value of the dollar.