He says that the dollar has performed poorly against other developed market currencies over the third quarter, ending the period where it was at the beginning of the year, despite the relative strength of the US economy.
Currency excitement
He adds: "The reasons that led us (and an increasing number of others) to be so excited about the dollar over the past 18 months were compelling valuations following a decade long slump, an improving current account balance, the rapid move towards energy independence, and a strengthening US economic recovery where a surging housing market and a steadily falling unemployment rate made it likely that the US would lead most of the world in the monetary policy tightening cycle."
Riddell argues that all these tailwinds for the dollar are still in place, but the dollar has been pushed weaker by the Federal Reserve’s non-tapering in September, the ongoing budget impasse, and the unwinding of a swathe of long dollar positions.
He sees these negative forces dissipating: "The decision not to taper was a close call, where most members still viewed it as appropriate for tapering to start this year and for asset purchases to be finished by the middle of next year. Yes, the government shutdown that has occurred since the meeting took place appears to be already starting to hit US economic data, and the weaker data is therefore likely to push the start date for tapering back a little.
New news?
"But if you assume that the government shutdown is a one-off event (admittedly not a particularly safe assumption), then the shutdown should merely slightly delay the tapering decision and the normalisation of its monetary policy, it should not result in a permanent postponement."
Riddell points out that the debt ceiling has been raised 74 times since March 1962: "Past performance is no guide to the future as everyone knows, but while this episode is particularly chaotic, is this time really different?"
