Hedge fund contrarian Russell Clark eyes euro rise against the dollar

Euro v dollar

The euro could be set to appreciate against the US dollar, says London-based global equities hedge fund Russell Clark Investment Management.

Russell Clark’s contrarian long/short firm, known for its bearish calls in global stock markets, believes that recent data on current account surplus, trade balances with China, and international investment positions all point to the dollar falling relative to the euro – with now being the time to buy the single currency.

Clark cited Bank of International Settlements stats which show the credit flows that fled both the US and European financial systems following the 2008 Global Financial Crisis and the 2011 European sovereign debt crisis have since returned to the US - but not Europe.

He said that despite the euro running a current account surplus – with the US running current account deficits during the same period – it has not meaningfully appreciated over time.

“Without the euro appreciating, this had led to widely divergent net international investment positions. Narrowing of positions can be caused by falling asset prices, or changes in exchange rates,” Clark said in a note this week.

“Another sign of the competitiveness of the euro exchange rates is that despite tariffs and trade deals, the US trade position with China has continued to deteriorate dramatically, while Europe has broadly flatlined for the last 10 years.”

The long-running firm – which was previously known as Horseman Capital Management before rebranding in May this year – acknowledged “a deep suspicion” of the euro in some quarters.

This, the note suggested, stems from fears of a break-up of the single currency, sparked by concerns over Italy’s exit, having suffered sustained underperformance in the early years of the euro.

But Clark observed how Italy has both grown its exports to China and taken a larger slice of overall European exports to China in recent years, reversing the squeeze it faced from new EU member-state competitors in central and eastern Europe.

He said despite “fundamental data” favouring the euro, until recently dollar investors would be compensated for these risks with “substantially higher” interest rates.

“The yield differential has fallen substantially,” Clark added. “The euro looks set to appreciate against the US dollar.”

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