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Choppy waters ahead for the big three currencies, says Newton’s Paul Brain

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Although the three biggest currencies enjoyed some strength last year, they will be vulnerable as and when a recovery takes place, according to Paul Brain, fund manager of the Newton In

Although the three biggest currencies enjoyed some strength last year, they will be vulnerable as and when a recovery takes place, according to Paul Brain, fund manager of the Newton International Bond Fund. 
 
Brain says the US dollar does not have the luxury of a low debt/GDP ratio or fiscal policy strength while much of the dollar’s strength over the past year or so has been down to its perceived safe haven status. However, a shift to economic growth will effectively render the US dollar as vulnerable as ever. 
 
Elsewhere, the euro remains dogged by underlying weakness in much of the Eurozone and the expectation of a slower recovery than in the US. The tide is also turning against the Japanese yen owing to the significant damage done to the Japanese economy.

‘The Japanese economy is in a mess,’ says Brain. ‘The government is borrowing in order to boost growth while the economy faces an ageing population and ailing exports in a wholly export-centric economy.’
 
This has prompted Brain to add exposure to the likes of the Norwegian krone, Australian dollar and Canadian dollar, with all three set to benefit from domestic fiscal prudence and commodity support. The same can be said for some emerging market currencies.
 
‘Norway’s vast sovereign wealth fund gives its domestic economy strong support, while central bank rates are at a high enough level to offer scope for rate cuts. Although the krone was vulnerable last year as oil prices fell from their mid 2008 highs, the rising oil prices seen so far this year should boost the currency,’ Brain says. 
 
After caution during the commodity boom years, the Australian government entered the economic crisis with a very low debt/GDP ratio. This means that as economic conditions worsen, the government is capable of increasing borrowing and boosting economic growth.
 
Despite painting a negative picture of the major currencies, Brain says this is more an opportunity to diversify than an obstacle.

‘While the US, Eurozone and UK economies will be riddled with debt for many years to come, Norway, Canada and Australia are benefiting from their financial prudence during the boom times and are boosted by commodity support – these are the currencies that we expect to flourish.’

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