JPMorgan Asset Management and T. Rowe Price believe the dollar will fall as America loses its exclusivity. But PineBridge Investments expects to strengthen. The currencies hit in the first quarter – from the euro to the Brazilian real – have tried to rally this month, leaving the dollar at a crossroads.
“There is a unique history of outstripping US interest rates offset by global cyclical rallies and the high value of the dollar,” said Ian Samson, head of a blended investment fund at Fidelity International in Hong Kong, which holds long US currencies against the euro. “The dollar is tossed from side to side.”
Most Wall Street analysts expected the dollar to weaken in January, but the global reserve currency rallied and speculative funds had to rush to cover $ 30bn net short positions. Treasury yields also rose, and rate hike expectations shifted to an earlier period.
In April, the Bloomberg dollar index fell by almost 2% and this strategy also turned out to be inoperative.
The whole world is striving to free itself from the devastating economic consequences of the pandemic. However, the States have vaccinated more citizens than any other country, which gives it the advantage to reopen the economy.
PineBridge Investments believes the multi-trillion dollar Biden administration’s fiscal stimulus and Fed policy will drive economic activity and help the dollar strengthen.
“US Treasury yields could rise even more once inflation rises,” said Omar Slim, portfolio manager at PineBridge in Singapore. “We believe that the dollar will continue to strengthen this year.”
The yield on US 10-year bonds is up more than 80 basis points this year, reaching 1.77% in March, the highest since the start of the pandemic. The benchmark fell back to 1.56% on Friday, still well above this year’s low of 0.90%.
“Positive US data could kick off the dollar rally again,” says Tu Lan Nguyen, currency strategist at Commerzbank AG. “So the US dollar bears should make sure they don’t rejoice too early.”
Make up for lost time
Not everyone is convinced that the US will continue to outperform the competition. Carcass Maharaj of JPMorgan Asset believes it will lose its exclusivity as other countries catch up with the US in terms of vaccination rates and reopen economies in the second half of the year. The London strategist monitors developed markets such as Europe, the UK and Japan and believes that the euro will outperform the dollar in the medium term.
“We expect these economies to have the same rebound as the US is now,” she added.
The dollar is ready to break the uptrend line
Judging by some indications, a similar trend has already emerged. The incidence of coronavirus is on the rise in all regions except Europe, the World Health Organization said on Tuesday. The European Union is launching a new immunization campaign to vaccinate most of the population within a few months, with the latest PMI data exceeding expectations.
The euro is up about 3% from a four-month low in March and broke the key $ 1.20 level last week.
Some people think that the dollar can outperform other currencies. Thomas Pullawek of T. Rowe predicts a further rise in the risk-sensitive Australian dollar as the Chinese economy recovers from the pandemic and the demand for commodities rises.
Edwin Gutierrez of Aberdeen Standard Investments is looking forward to adding more risky emerging currencies as “the rest of the world picks up the pace of vaccine adoption.”
The Brazilian real, Indian rupee and Colombian peso, which have been hit by the coronavirus raging in these countries, topped the sovereign debt rankings of developing countries in London.
The dollar is overvalued
At the same time, bears continue to warn of long-term problems for the dollar.
“In the near term, we continue to expect a structurally negative outlook for the US currency,” wrote strategists at Goldman Sachs Group Inc., including Zach Pandle. “The dollar is still highly overvalued.”