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Markets

Expect the Dollar to Buck Up Soon

A rally would bring consumers a little relief on prices, but it may not last long.

David Hoffman is a managing director and portfolio manager for Brandywine Global Investment Management, in Philadelphia, where he specializes in global markets and currencies.

Has the dollar bottomed?
We think that over the next six to 12 months, there could be a significant move up in the dollar relative to European currencies. But we're not pinning our portfolio strategies on a long-term bull market in the dollar, and we don't see much of a rally against Asian currencies, with the exception of the yen.

The dollar is in the process of bottoming. If you look back to the last time that happened, it took seven to eight years, from 1988 to 1995. During that time the dollar was in a mild bear market, with occasional rallies of 14% or so. There may not be another major bull market in the dollar until 2012 or 2015.

Will the rebound you expect over the short haul be significant in terms of moderating inflation?
A dollar rally may take the wind out of commodity speculation, and it should help on gasoline. We think oil could trade at $80 to $100 a barrel again. But the energy and commodity markets have seen tremendous financial speculation, with some hoarding of commodities. Price is the best solution for boosting supply in both energy and food. High prices will cause people to plant more, spend more on crops and get more for them, leading to more-moderate prices eventually. But that takes time; things aren't going to turn around in six months. A rally in the dollar will help some, but time will help more.

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What would need to happen to stimulate a major turnaround in the dollar?
Interest rates would have to come out of crisis mode in the U.S., with yields after inflation in the 2%-to-3% range or higher -- and higher than in Europe and Japan. Also, the trade deficit has been improving significantly. If it were to turn positive -- a possibility in the next year or two -- then the dollar would stop depreciating.

So how should investors play this dollar bounce?
Resist enticements to speculate against the dollar. Exchange-traded funds and other vehicles provide a way to play the dollar and bet against it. That's the trade du jour, but people should give up on it for the moment. Anything negative about the dollar is known and reflected in the market.