US dollar set to be currency winner as global deflation fears grow
Strength of US economy relative to others will see currency pick up as heavily burdened economies struggle to service and repay rising debt
When deflation bites or threatens to emerge, there are currency winners and losers as local policymakers try to counteract falling prices that threaten the well-being of debt-fuelled economies.
Debt-burdened economies cannot afford deflation, as the capacity to service and repay debt is impaired as dropping prices squeeze profit margins and the real debt burden increases as underlying asset prices fall.
Picking a currency winner means identifying an economy that appears stronger relative to others, where the economic data currently suggests deflation is not an immediate threat or is at least not a current focus of the local central bank's monetary policy.
The clear pick is the US dollar as, following Friday's strong headline jobs and decent hourly earnings data, markets are again thinking the Federal Reserve could be tempted to raise interest rates in the middle of this year. Deflation does not seem to be on the Fed's mind, currently.
In fact, a strong dollar is itself a form of monetary tightening, making imports into the United States cheaper. The dollar may be doing the Fed's job for it, allowing the US central bank to take its time deciding whether or not an actual rate increase is needed.
Either way, while the Federal Reserve contemplates whether or not to tighten, US monetary policy is already effectively tightening on a comparative basis as many other central banks are loosening policies to prevent deflation becoming entrenched.