Newport Beach, California: The dollar is in danger of losing 20 per cent of its value over the next few years if the Federal Reserve continues unconventional monetary easing, Bill Gross, the manager of the world's largest mutual fund, said.
"I think a 20 per cent decline in the dollar is possible," Gross said, adding the pace of the currency's decline was also an important consideration for investors.
"When a central bank prints trillions of dollars of cheques, which is not necessarily what [a second round of quantitative easing] will do in terms of the amount, but if it gets into that territory — that is a debasement of the dollar in terms of the supply of dollars on a global basis," Gross told Reuters in an interview at his Pacific Investment Management Company (Pimco) headquarters.
The Fed will probably begin a new round of monetary easing this week by announcing a plan to buy at least $500 billion (Dh1.8 trillion) of long-term securities, what investors and traders refer to as QE2, according to a Reuters poll of primary dealers.
Fundamental problem
"QE2 not only produces more dollars but it also lowers the yield that investors earn on them and makes foreigners, which is the key link to the currencies, it makes foreigners less willing to hold dollars in current form or at current prices," he said.
To a certain extent, that is what the Treasury Department and Fed "in combination" want, said Gross, who runs the $252 billion Total Return Fund and oversees more than $1.1 trillion as co-chief investment officer.
Many Americans believe that the Chinese government is manipulating its currency and in effect stealing away American jobs and throwing the US in an ever-deepening trade deficit. But Gross said this is a byproduct of a globalised economy.
"It is a globalised economy of our own doing for the past 20-30 years. We encouraged all of this, but it is coming back to haunt us. To the extent that Chinese labour, Vietnamese labour, Brazilian labour, Mexican labour, wherever it is coming from, that that labour is out competing us and holding down our economy," he said.
Gross added: "One of the ways to get even, so to speak, or to get the balance, is to debase your currency faster than anybody else can. It's a shock because the dollar is the reserve currency. But to the extent that that is a necessary condition for rebalancing the global economy overtime, then that is where we are headed."
He added: "Pension funds and Americans, in general, have a problem because their liabilities are dollar-denominated. It's probably worth the risk of getting out of dollars and getting into emerging countries and going where the growth is. All of which entails risk relative to the home country. But there's probably a bigger risk in simply staying comfortably within the confines of dollar-based investments."
