The U.S. dollar’s decade-long bull run is at an end, say top money managers, who are positioning for a stronger-growth, weaker-dollar world.
This bearish take on the dollar was the near unanimous verdict of investors attending the annual Reuters Investment Outlook summit this week, who predicted that non-U.S. assets, from commodities to emerging markets to European stocks will perform well while U.S. interest rates remain stapled to the floor.
Having strengthened more than 40% since the depths of the 2008 crisis, the dollar is on track for its first annual loss in three years versus a six-currency basket. And there is likely to be more to come -- forwards price the dollar to weaken roughly 1.2% against the euro in the coming year.
“The markets are right, I think the dollar will cheapen from here,” Rick Rieder, BlackRock’s chief investment officer for fixed income, told the Reuters summit.
He acknowledged there would always be an “organic bid” for dollars as the world’s premier reserve currency, but that should not prevent it weakening at least moderately while the euro and emerging market currencies strengthen, he said.
Such views are echoed across investment banks, with Citi predicting a 20% dollar decline in 2021. BNP Paribas expects the currency to weaken to $1.25 versus the euro while Deutsche sees it at $1.30 by end-2021.
Dollar bears’ forecasts are predicated on the global economy picking up traction next year as vaccinations control the coronavirus pandemic, a game-changing recovery fund lifts sluggish European growth and China leads an emerging market rebound.
That marks a shift from the past decade when booming U.S. expansion sucked in investment into U.S. government bonds as well as the mega-cap technology sector.
Signs of that shift are reflected in Citi’s economic surprise indexes for Europe and emerging markets -- having lagged all year, they are now decisively outperforming their U.S. counterpart .
“A re-emergence of a growth gap between the rest of the world and the U.S. should push the dollar down,” David Kelly, chief global strategist at JPMorgan Asset Management, estimating global GDP growth had outpaced the United States by just 0.4% in the past decade.
And one other dollar-supportive factor -- President Donald Trump’s trade wars -- should recede when he leaves the White House.
OUT-DOVING THE FED
The dollar peaked at the height of the coronavirus turmoil in March and has since fallen 12%. The catalyst was the Fed’s decision to cut interest rates to 0%, removing the alluring yield advantage U.S. bonds had long enjoyed over Europe and Japan.
The Fed then announced it would tolerate inflation overshoots -- essentially promising years more of rock-bottom interest rates.
“It’s going to be very difficult for any other central bank to effectively out-dove the Fed,” said Peter Fitzgerald, chief investment officer for multi-asset and macro at Aviva Investors, referring to Fed balance sheet expansion relative to peers.
He is long the euro, yen and some emerging market currencies versus the dollar.
A key reason for dollar strength was the foreign cash pouring into U.S. markets -- BNP Paribas calculates that between 2014 and 2020, Japanese and European investors purchased over $1 trillion of U.S. debt.
And most purchases were also unhedged, meaning investors did not usually sell the dollar in forward markets to insure foreign currency exposure. But lower U.S interest rates have reduced hedging costs to five-year lows, BNP Paribas says, highlighting this as potentially a key driver of dollar weakness from here.
As for equities, the bet is post-COVID normality will spur investors to rotate out of big Silicon Valley plays and into more growth-sensitive shares, including banks and commodities, which feature heavily on European and emerging market indexes.
So how far will the dollar fall? Jim Leaviss, head of fixed income at M&G Investments, is heavily underweight the dollar but reckons the U.S. currency’s weakness may soon run out of steam as other central banks act to dampen their own currency.
But others are more bearish.
“What we tend to see when economies come out of recession is the dollar weakens and in many cases weakens quite dramatically,” said Norman Villamin, chief investment officer for wealth management at UBP.
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