A move towards US energy self-sufficiency looks set to spur broad demand for the dollar, with the biggest gains likely to come at the expense of the yen. The International Energy Agency forecast last week the world's biggest economy, until recently a major importer, would come close to self-sufficiency by 2035 thanks to new technologies unlocking massive resources of shale oil and gas.
Looking forward 20 years - longer than the euro has existed - makes prediction highly speculative and the IEA forecast includes big assumptions about, for example, Chinese demand. However, many currency strategists said a surge in oil and gas output would slash US imports and cut the country's current account deficit, a major driver of the dollar's value.
And they said some investors are already considering selling the yen against the US currency for this reason. "A persistent current account deficit has been a strong driver for multi-year dollar weakness," said Citi's head of European G10 FX strategy Valentin Marinov.
"But a growing number of clients see the latest push towards energy self-sufficiency in the US as an important dollar positive that transcends the usual risk-on, risk-off world we live in." The dollar generally gains in times of market tension as investors seek shelter in the world's most liquid currency. While the impact on the oil price is unclear - forecasts in a Reuters poll for the Brent price in 2020 range from $70 to $184 a barrel, compared with the current $110 - US industry should become more competitive, especially against major oil importers such as Japan.
BNP Paribas models show fair value for the dollar has declined about 10 to 15 percent over the past decade due to the negative terms-of-trade effect of rising oil prices and the accumulation of foreign liabilities resulting from persistent US current account deficits. If energy self-sufficiency were to cut the $117.4 billion current account deficit - Citi estimates it could fall by 25 percent - some doubts about the dollar may disappear and demand could rise, although probably not by a proportionate amount.
"People are already ploughing money into the dollar because of the lack of safe-haven options. This just gives them better reason to do it," said Rabobank senior FX strategist Jane Foley. Dollar gains are likely to be most pronounced against the currencies of oil importing countries, like Japan.
Although the highly liquid yen is also seen as a safe haven, Japan's economic outlook is worsening just as the US economy shows signs of improving. Japan's trade deficit is deteriorating and it is increasingly reliant on energy imports after the 2011 Fukushima disaster shut down the nuclear industry. FX analysts say this could help push the yen lower against the dollar.
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