The euro is currently overvalued, and it may have to fall to undervalued levels before the sovereign debt crisis is resolved, says this money manager.
Ken Dickson, investment director of currencies for Standard Life Investments, is short the euro against the dollar, and he has been for some time. Actually, he is $1.5 billion short the euro in one long-term fund, and he says he is "very comfortable with the position."
In Dickson's opinion, investors are pricing in about 100 basis points of interest-rate hikes for the euro this year, but he anticipates no more than 75 basis points. That could hurt near term, he says, and longer term, the peripheral countries' problems are going to drag. Dickson estimates that fair euro-dollar value for troubled countries like Greece, Portugal, and Ireland would be in the $1.00 to $1.10 range, and fair value for the eurozone overall is between $1.20 and $1.25.
"In general, when you have this kind of sovereign debt problem and slow trend growth, and in addition to that high funding costs, you have the benefit of a weaker currency to help make the pain more bearable during the fiscal consolidation that is required to bring the debt metrics back toward something more sustainable," he told me.
In the U.S., in contrast, Dickson expects economic fundamentals to gradually improve, boosting the dollar. And in the near term, he told me, "The short positions that are in the market now are becoming quite extreme, and we are very close to what is perceived to be, in terms of sentiment indices, extreme bullishness on the euro. That combination suggests that downside on the dollar is fairly limited as far as we're concerned."
CURRENCY FUTURES
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