The exchange rate of the euro against the dollar has increased its most favorable level for the community currency since the beginning of 2022up to 1.12. The reality is that if we take the average of the last three years, the risk of loss in the event of buying dollars is almost non-existent, while the maximum gain, if the dollar appreciates to its ceiling of one euro for 1.04 greenbacks over the last three years, it would exceed 7%.
Among the investment strategies that can be prepared with this scenario is the change of preference from US fixed income securities in euros to the same debt in dollars. Logically, this is a much more difficult dish to digest for the investor. But if we think about it, it is part of the speculative decision to decide to have American debt versus European securityThe immediate answer is that it offers higher profitability than the eurozone. The yield on ten-year US bonds, which fell to its lowest level in June last year, stands at 3.86, compared with the 3.1 that, for example, a ten-year Spanish bond pays in interest.
But there is an additional element that allows us to think that the dollar can generate positive behavior for the profitability of a portfolio: that the marathon of rate cuts is deeper in the case of the Federal Reserve than from the European Central Bank. Although the first step in this race was taken by Lagarde and not Powell, after the last minutes of the American monetary institution, it became clear that the fall in the price of silver that will take place in September was decided in July. This has led to a drop in the US ten-year debt of 100 basis points from the highs of the year to current levels.
Another point in favor of the fact that we could be close to maximum dollar weakness is that Powell, who in his speech at the Jackson Hole symposium literally went so far as to say that “the time has come to adjust policy,” is convinced that it is possible to achieve something historically unusual: a soft landing of high interest rates and controlling inflation without causing a recession that would lead to a sharp rise in unemployment. In fact, former Bundesbank President Karl Otto Pöhl used a much easier-to-understand metaphor to convey the difficulty central banks have in solving the inflation problem: “It’s like toothpaste: it’s very easy to get it out of the tube, but almost impossible to put it back in.”
As an investor, there is never a right or wrong path, only good or bad decisions that are complicated to make, and an aggressive solution is to have a little more of a portfolio of US debt in dollars than even in euros if you think that the recession is avoidable.
