The U.S. economy is headed for a new recession, said John Taylor, chairman and chief investment officer of FX Concepts, and that will likely benefit the dollar and weigh on commodity prices.
It's a new recession. We're already growing, but the numbers show that the U.S. government is still the primary creator of this growth, said Taylor, who runs the world's largest currency hedge fund with assets under management of around $8.5 billion.
I would argue that by the middle of next year, we will be in a recession and our fiscal hands will be tied.
Banks in a recession tend to demand the repayment of loans, and if the debt is denominated in the U.S. currency -- and in most cases they are -- then investors are squeezed as they scramble to find dollars to repay the debt.
This was what happened in late 2008 when the safe-haven dollar strengthened against most major currencies.
It's kind of perverse. When the U.S. economy is doing badly, the dollar goes up and when the economy is doing well, the dollar goes down.
For now, all eyes are on the euro zone, which is facing a debt crisis. Theoretically, at some point the euro could fall apart, Taylor said,
What Europe has done is not enough. They have to have eurobonds, said Taylor. You can't lend money to Ireland or Greece. You're just piling on more debt to them, and it's getting harder and harder to repay.
Taylor said Portugal could be the next country to seek a bailout after Ireland, with Spain after that. This will push the euro to parity versus the dollar by next year, he forecast. In early New York trading, the euro was down 1 percent at $1.3277.
He recommends selling the euro against the Swiss franc, a currency whose economy has fared better than most European countries.
The FX Concepts chief is also bearish on commodities, predicting that this asset class will slow down next year as the U.S. economy goes into recession. That should be negative for commodity-linked currencies such as the Australian and Canadian dollars.
He said the Australian dollar, which has been the best performing currency so far among currencies from the Group of 10 rich nations, with gains of about 10 percent on the year, could slide 15-20 percent.
FX Concepts employs several investing strategies. Its global currency program, which invests in both developed and major emerging market currencies, dipped 4.26 percent in November, but its annual return for 2010 is estimated at 12.03 percent.
(Editing by Padraic Cassidy)