It requires a special skill and takes a special effort to lose money being invested in financial markets in a year when every asset under the sun went up. I managed it in 2017. Well, not everything went up. The US dollar did not. It had the worst year in a decade. That is part of the problem. My reference currency is Singapore dollars. It appreciated 6.9% against the US dollar in 2017. Second, the return does not take into account the return on Indian stocks. Third, it does not include the performance of illiquid investments (held or exited). So, to that extent, my overall returns might be understated. Still, to be able to incur a loss on financial assets in 2017 must take some doing. It is a story of currency bets that did not turn out well last year.

One easy explanation is that I had very little exposure to equity markets in my financial asset portfolio. I shall not dwell further on it. Further, I had bet on the US dollar appreciating, for two or three reasons. The US had stopped printing money explicitly and was raising interest rates. In a world starved of yield and with the eurozone having negative policy rates, higher yield should be tempting for investors. Second, the eurozone was still engaged in quantitative easing (asset purchases). Everything else being equal, the currency whose supply is rising faster should lose value against the one whose supply is not rising as fast. The dollar supply was not rising as much as the supply of the euro or the Japanese yen. Or so, I thought.

What I failed to reckon with is that the US dollar is a counter-cyclical currency. When global confidence returns or when the world is experiencing faster growth than the US, the supply of dollars increases and the rest of the world is attractive. When the rest of the world is growing faster than the US economy, they are a higher beta play on the US economy. They do better. Most world economies prosper by exporting to the US. That increases the global supply of US dollars. In the 12 months to November 2017, US trade deficit was $558 billion. It was little over $500 billion in the 12 months to November 2016. In terms of current account, the US current account deficit has been around 2.5% of gross domestic product (GDP) in the last several years. In contrast, the eurozone had a current account surplus of 3.2% of GDP in the 12 months to October 2017. The surplus was 3.4% of GDP in the 12 months to October 2016.

Second, anticipated political developments in the eurozone did not materialize. When they did, the market ignored them. France elected Emmanuel Macron with a good mandate. The eurozone heaved a huge sigh of relief. The market was not fazed by the Catalan separatist movement in Spain. Further, when Germany did not return Angela Merkel to office with a clear verdict (they are yet to form a government), the market simply shrugged. So, notwithstanding the money printing by the European Central Bank (ECB), negative interest rates, eurozone current account surplus and the failure of the “Far Right" party in France to come to office helped buoy the euro against the US dollar. The euro gained 13.9% against the US dollar in 2017.

The bet on the pound sterling soured too. The expectation was that the currency would navigate the Brexit negotiations better than it has done in reality. The currency had dropped already quite a bit in 2016. Also, I had expected Theresa May to win the election comfortably. She scraped through in the end and Brexit negotiations have been harder. Britain’s big trade deficits overall and in particular with eurozone did not help either. The UK economy remains uncompetitive, despite a weaker sterling.

Finally, the bet against the Australian dollar was supposed to be a bet on the popping of its housing bubble and a bet against China. Neither imploded. Australia’s housing bubble—one of the most extremes in the world—has not quite popped to the extent that it caused a meltdown in the economy. Similarly, China’s economy had stabilized in 2016 and continued to remain stable in 2017. In fact, it is responsible for the global economic recovery with its credit creation, yet again.

So, what are the lessons? First, currency bets over any horizon less than three years cannot beat the toss of coin. Fundamentals matter only beyond that. Second, what matters for the US dollar is its relative supply based on global growth and US trade flows rather than its interest rate advantage. The US’ real rate advantage worked in its favour only between 1982 and 1985 and between 1996 and 2001. Otherwise, trade and current balances seem to matter more. Eurozone’s current account surpluses have dominated the large asset purchases of the ECB and negative interest rates.

As for the UK, since everyone seems pessimistic on the country, on its political leadership, on its economy and on its competitiveness, perhaps, it is not the time to become more pessimistic on the currency, even though the currency has been quite a laggard for quite some time.

What can one say about Australia and China? Well, one is a lucky country and the other defies logic and has defied logic for quite some time. There is no telling when luck would run out on both of them.

Finally, the most important lesson is that it might be too late to do the opposite in 2018. The global economic cycle is too mature for it to continue in the same fashion. Of course, this could be my (irrational) rationalization, reflecting reluctance to cut losses. Readers can draw their own conclusions.

V. Anantha Nageswaran is an independent consultant based in Singapore. He blogs regularly at Read Anantha’s Mint columns at

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