* Shrinking U.S. deficit to entice dollar buyers
* Yen vulnerable to energy import needs
* Short-term risk to Canadian dollar from export decline
By Nia Williams
LONDON, Nov 23 A move towards U.S. 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 U.S. 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 U.S. 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 U.S. as an important dollar
positive that transcends the usual risk-on, risk-off world we
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 - U.S. 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
U.S. 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 U.S. 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.
High oil prices have in the past had little impact on the
dollar/yen exchange rate as both countries are net importers.
But if the United States comes close to energy
self-sufficiency the currency pair could display a new positive
correlation with rising oil prices.
Investors are already taking note.
"You cannot assume that the reactions of currencies in the
past to moves in the oil price will hold in the future. A lot of
discretionary clients now are interested in being long
dollar/yen," said Daniel Brehon, FX strategist at Deutsche Bank.
Analysts said the currencies of other oil-importing
economies, including the euro, could also fall versus the dollar
if oil prices rise. None were willing to make specific price
forecasts however, given the long time horizon.
CANADA EXPORT RISK
Initially, the Canadian dollar may also be vulnerable to the
U.S. energy boom.
Although proposed pipelines to the Pacific and U.S. Gulf
coasts would open up Asian markets, until they are completed
Canadian energy export volumes may decline as its biggest
customer produces more of its own oil and gas.
"In the short-term Canada will be one of the losers on the
other side of U.S. dollar gains but in the longer-term there
will be substitution of the U.S. with other markets," said Adam
Cole, head of FX strategy at RBC Capital Markets.
As long as lost U.S. demand can be replaced with customers
in emerging markets, other "oil currencies", such as the
Norwegian crown should still benefit if crude prices rise.