The U.S. dollar will strengthen when the global economy slips back into recession, according to John Taylor, who oversees $7.5 billion at FX Concepts LLC, manager of the world’s largest currency hedge fund.
“The dollar will be weak, but only for another couple of weeks -- then it’s going to turn around,” Taylor, 67, said in a Bloomberg Television interview. Because most global debt is dollar-denominated, when economic conditions weaken and U.S. banks cut back on lending, international banks scramble for the greenback and boost its value, he said.
“The catalyst for the turnaround is things get much worse,” said New York-based Taylor. “The banks aren’t nervous now, but they’re going to be nervous when the economy starts to roll over in the third and fourth quarter.”
The euro will peak between $1.32 and $1.35, he said. The euro climbed 0.8 percent to $1.3296, the highest level since May 3, at 10:53 a.m. in New York.
“We haven’t sold it yet -- we still own it,” he said. “I wouldn’t be surprised to see it peaked out here today, right here. It’s not going to go much further than this. On the other side going down, it’s a little early to say how far it’s going to go, but $1 to 1.10 is very realistic.”
A government report today showed companies in the U.S. added workers in July at a pace that suggests the labor-market recovery will be slow to take hold.
Private payrolls that exclude government agencies rose by 71,000 after a June gain of 31,000 that was smaller than previously reported, Labor Department figures in Washington showed today. Economists projected a 90,000 July increase, according to the median estimate in a Bloomberg News survey. Overall employment fell 131,000 and unemployment held at 9.5 percent.
“It was a bad number, but not so bad as to cause a crisis,” Taylor said. “It’s a Goldilocks number for the Europeans and the rest of the world, because it means the U.S. will keep interest rates low and money will flow out of the U.S. and they’ll be able to grow.”
The weak dollar hurts European exporters, Taylor said, as the euro zone tries to recover from slumping bonds from peripheral nations during the first half of the year. The Greek 10-year yield surged to a record of more than 12 percent this year due to speculation the countries would struggle to finance their debt.
The losses forced a European Union and International Monetary Fund bailout, including the purchase of securities by the European Central Bank. Taylor said Greece will default, followed by Spain.
“As time goes on, we’re going to see the Greek numbers and Spanish numbers look worse than we expected,” Taylor said.