Currencies: Some Thoughts about the Next Decade

Here are two key trends to watch in global currency markets as the 2020s unfold.

In our 2020 Investment Outlook roundtable, I joined other Lord Abbett investment professionals in examining the key themes for global economies and markets in the year ahead. But of course, in addition to the start of a new year, January 1, 2020, brings the beginning of a new decade. In that spirit, I’d like to spotlight some of the key topics our investment team has been thinking about for the next 10 years in the currency markets.

First, though, a brief review. The last 10 years could be thought of as the decade of the U.S. dollar as a result of the United States being the “best house” in a rundown global neighborhood. The U.S. Federal Reserve’s (Fed) Broad US Dollar index has risen 39% since its 2011 lows, based on Fed data. Europe had more than its share of issues, and there were multiple times in the past decade when the market had to weigh the very real prospect of a breakup of the eurozone. In our opinion, the fact that the euro has survived to ring in 2020 means that the currency union is likely here to stay. 

Nonetheless, a breakup in the European Union is still likely to happen with the United Kingdom following through on Brexit, which will put strains on the U.K. economy for the next few years at least (and may even lead to the breakup of the United Kingdom itself!). Japan is still chugging along at very low growth and inflation levels; we don’t see a catalyst for either significant improvement or deterioration in the outlook for the world’s third largest economy.

What about the next 10 years? Over the coming decade there are two key factors that we think will shape the global economic and foreign exchange outlook:

1. The U.S. shale revolution not only changed the dynamics of the oil market but also bolstered the external accounts of the United States by neutralizing the petroleum trade balance. This provides a higher base of support for the U.S. dollar, in our view, making it much less likely we will see similar dollar weakness as we did in the beginning of the 2000s.

2. If the last decade was dominated by monetary policy, it is quite possible that the next could be dominated by fiscal policy. At the current low level of global interest rates, countries may not have any choice but to use fiscal stimulus to support growth. Europe may finally see the need to create a genuine fiscal union as the impact of monetary easing wanes. Environmental policy will continue to be very important, especially outside the United States, and could provide the target for increased fiscal spending.

While the impact of increased fiscal spending may be modestly higher interest rates, without a spike higher in inflation, yields likely will be capped at lower levels than in past cycles. Currencies of countries implementing this fiscal expansion could see some appreciation, as long as the resulting deficits are easily financeable by the market.

Summing Up
There are many other factors that could influence global economies and currencies over the next decade, both known and unknown. We will continue to track developments in geopolitics, fiscal policy, and commodity markets as we determine how the macro backdrop will inform our investment decisions.