You have to give Axel Merk credit for sticking with his outlook for economic growth and foreign-exchange markets.
Creeping consumer prices are set to curb a wave of loose monetary policy unleashed by the European Central Bank in January, Merk, the president of Merk Investments LLC of Palo Alto, California, wrote in a note distributed Tuesday.
That promises to disrupt one of the market’s favorite themes: the divergence of U.S. monetary policy from the rest of the world and, with it, dollar strength that’s sapped Merk’s returns.
Central banks may have to “start back-peddling on their ultra-loose policy as inflation is inching up,” Merk wrote. “In much of Europe, expect mostly dovish talk, then a change of heart that might come rather suddenly.” Sweden’s Riksbank, which boosted its program of quantitative easing as recently as April, will have to do a “U-Turn” on policy, he wrote.
So far he’s been wrong with regards to the dollar. The greenback has climbed versus all most of its major peers this year as the Federal Reserve’s plans for higher rates contrasts with asset purchases and negative borrowing costs overseas.
The Merk Hard Currency Fund has shrunk to $150 million, from $255 million at the end of September. It has lost about 8 percent this year, trailing over 80 percent of its peers, according to data compiled by Bloomberg.
The euro area took another step away from deflation in May, when consumer prices rose for the first time in six months after holding steady in April, a report showed Tuesday. Inflation expectations have also edged higher, with one of the ECB’s preferred measures at 1.77 percent, approaching its highest since November. Policy makers are targeting just below 2 percent.
With inflation threatening to keep real interest rates negative for an extended period, Merk’s preferred investment is gold, a traditional hedge against consumer-price moves. The dollar is vulnerable to disappointing economic data and may still be overvalued, he wrote.
“Gold is an asset with a positive return expectation over the long term,” Merk wrote. On the greenback, “we believe the market got way ahead of itself. Even with the recent leveling off, we believe the dollar may still be expensive.”