US currency buoyed by strong economy, relatively high rates and copycat policy moves
Richard Henderson, Eva Szalay and Robin Wigglesworth
Last week Zach Pandl threw in the towel. For months, Goldman Sachs’ top currency strategist had maintained a bearish forecast on the US dollar, in the expectation that the mix of global growth “would turn less dollar-friendly” this year as other economies rebounded.
But in a mea culpa last Friday he switched tack, saying the euro should continue to “grind lower” against a resurgent US currency.
Goldman’s co-head of global FX is not the only specialist on Wall Street to have been wrongfooted by the greenback’s renaissance, which has come in spite of an abrupt policy shift from the Federal Reserve.
Spooked by last year’s market turmoil, the US central bank made a U-turn in January, and in March went as far as shelving plans to raise interest rates at all this year. Few expect a change in tone at this week’s meeting on Wednesday.
The ebb and flow of global growth and monetary policy typically influences exchange rates, and normally such a shift would sap a currency of its vigour.
But the dollar has been resurgent — thanks, analysts say, to the resiliency of the US economy, still-high interest rates relative to the rest of the world and a scramble by other central banks to match the Fed’s sudden dovishness.
The DXY index, which measures the dollar’s strength against a basket of other major currencies, last week powered to its highest level since May 2017. The euro, its most-traded counterpart, has slipped to a two-year low.
“The dollar is the best house in a bad neighbourhood,” says Brad Bechtel, global head of FX for Jefferies. “It seems like the Fed was the first to shift and the rest of the world is trying to keep up.”
The most prominent move beyond US borders has been from the European Central Bank, which in March signalled that the prospect of higher rates remains a long way off, even as growth has showed signs of picking up. The ECB’s deposit rate still sits in negative territory, at minus 0.4 per cent, compared to the 2.5 per cent top band of the Fed’s short-term interest rate.
Some traders have been betting that the next move in interest rates from the Fed may be down rather than up, given weak inflation data. But with the economic growth rate coming in at a forecast-beating 3.2 per cent in the first three months of the year, analysts argue that this looks premature. Employment data due on Friday, they say, could ease concerns over an imminent cut in US rates, which remain the highest in the developed world.
“There’s no other currency anyone wants to buy — even if the Fed is on hold it’s still the highest yielding G10 currency,” says Kit Juckes, global head of FX strategy for Société Générale.
Derivatives markets reflect this. Investor bets on a weaker euro now stand at their highest level since December 2015, according to the latest data from the Commodity Futures Trading Commission. In contrast, positive bets on the dollar by fund managers now outstrip bearish ones by the biggest ratio since late 2016.
Plenty of analysts are continuing to question all this dollar optimism. Morgan Stanley’s chief currency strategist, for example, is sticking to his guns, with a prediction that by the end of the year, one euro will buy $1.20, marking a large decline for the dollar from the current exchange rate of $1.12.
Similarly, Goldman’s Mr Pandl might have revised his short term euro target to $1.10, but he kept his one-year prediction of $1.20 per euro untouched, arguing that a broader bounce in global growth should cap the greenback’s rise.
Ulrich Leuchtmann, a strategist with Commerzbank, points out that the squeeze the euro is facing on the back of the ECB’s dovish tack, was not seen in the dollar when the Fed first signalled a similar shift late last year — an anomaly that should spook investors, he argues. The current “dollar euphoria” is “excessive”, Mr Leuchtmann says.
For now, however, the resurgent US currency is posing a threat to emerging markets, many of which depend on dollar funding and remain sensitive to shifting exchange rates. The perennial weak links — Argentina and Turkey — have been particularly badly hit since the turn of the year. The Argentine peso and Turkish lira are now the worst performing major currencies of 2019, losing 13 per cent and 11 per cent, respectively, against the dollar.
A persistently strong greenback could also begin to weigh on the effervescent US stock market, where many big companies with international operations could see their foreign earnings translate into fewer dollars.
“Overall, the past week has been dominated by higher US equity prices and . . . a dollar outperformance story. In our view, this week should see a test of that new trend,” says Jordan Rochester, an FX strategist at Nomura.
0 comments:
Publicar un comentario