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- Bloomberg
Dollar Falls to 2018 Lows as Vaccine Optimism Damps Haven Demand
(Bloomberg) -- The dollar dropped to a two-and-a-half year low as the prospect of vaccine roll-outs added to headwinds for the world’s reserve currency.The Bloomberg Dollar Spot Index fell as much as 0.2% to an April 2018 low after U.S. officials said vaccinations may start in less than three weeks. The pound and the Norwegian krone led gains against the greenback Monday, while the yield on 10-year U.S. Treasuries rose three basis points to 0.86%.“The vaccine news is favoring the view of a sooner-rather-than-later global economic recovery with the USD losing its safe-haven appeal along the way,” said Rodrigo Catril, a currency strategist at National Australia Bank Ltd. “This is a risk-positive, USD-negative backdrop, especially with the Fed likely to remain ultra-dovish for some time.”An inoculation that offers adequate protection against infection could help power a rebound in global growth and add momentum to a rally in equities and other riskier investments. That outlook is undermining the greenback, which tends to benefit in times of heightened uncertainty.According to Citigroup Inc., the dollar is likely to drop as much as 20% in 2021 should Covid-19 vaccines become widely distributed and help revive global trade and economic growth. Morgan Stanley recommends selling the dollar in favor of stocks and credit, while Goldman Sachs Group Inc. prefers shorting the U.S. currency against developing-nation peers, including the Mexican peso and South African rand.“We would be reluctant to back away from USD shorts with that important tailwind now in place,” Goldman strategists including Zach Pandl wrote in a note.‘Weakening Bias’“Global economic recoveries can correspond with dollar bear cycles, as safe-haven flows to the U.S. decrease and investment opportunities beyond the U.S. increase,” said Stephen Innes, a strategist at Axi.The dollar has fallen more than 11% from a record high in March. Meanwhile, the MSCI All Country World Index -- a benchmark for global equities -- has rallied about 60% from a low in March and was trading near an all-time high on Monday.The dollar has come under pressure in recent weeks after Joe Biden’s victory in U.S. elections fueled expectations for reduced geopolitical tensions and more fiscal stimulus. The prospect of an extended period of loose monetary policy from the Federal Reserve is further weighing on the greenback, with real yields firmly in negative territory this year after nominal rates fell and U.S. inflation expectations remained comparatively elevated.“Low real yields in the U.S. have corresponded to a weakening USD since the pandemic,” said John Velis, a strategist at BNY Mellon. “This is why we think the dollar’s weakening bias will stay intact into 2021.”(Updates throughout)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
- Bloomberg
Citigroup Says Dollar May Drop by 20% Next Year on Vaccines
(Bloomberg) -- The dollar is likely to begin a drop of as much as 20% in 2021 should Covid-19 vaccines become widely distributed and help to revive global trade and economic growth, according to Citigroup Inc.“Vaccine distribution we believe will check off all of our bear market signposts, allowing the dollar to follow a similar path to that it experienced from the early to mid-2000s” when the currency started a multi-year downturn, Citigroup strategists including Calvin Tse wrote in a report Monday.The Bloomberg dollar index, which has fallen about 11% from its March peak, came under additional pressure Monday following news that Moderna Inc.’s Covid-19 vaccine was effective in a clinical trial, weighing on demand for havens like the greenback, the yen and Treasuries.Strategists have been positing for months that the U.S. election, vaccine breakthroughs and Federal Reserve policy could deal a serious blow to the currency. The election wasn’t ultimately the catalyst for a significant plunge, but Citigroup says the broad macroeconomic backdrop will be a bigger driver of the dollar going forward.Investors should subsequently go long on the Australian dollar and the Norwegian krone as both are commodity-linked currencies that should benefit from a cyclical global recovery, Tse said in an interview. On top of that, Norway “has a relatively hawkish central bank compared to a sea of doves everywhere else, and the currency is very undervalued.”Rotation ExpectationCitigroup expects that in addition to the impact from vaccine breakthroughs, the dollar will suffer as the Fed will remain dovish as the global economy normalizes, the rest of the world is likely to grow at a faster pace and as investors rotate out of U.S. assets and into international assets.And “should the U.S. yield curve steepen as inflation expectations rise, this will incentivize investors” to hedge currency exposure, the strategists said. “Given this setup, there is the potential for the dollar’s losses to be front-loaded,” with the currency spiraling lower sooner.The consensus of forecasters surveyed by Bloomberg is that Intercontinental Exchange Inc.’s widely watched dollar index, the DXY, will weaken by about 3% through the end of next year. Its biggest annual decline came in 1985, when it sank 18.5%.Citigroup notes that in 2001, the catalyst that kicked off the multi-year downtrend in the greenback was China’s joining of the World Trade Organization. That “spurred a wave of globalization, pushing global trade volumes higher, leaving behind the closed U.S. economy that had a much lower beta to global growth.”“There is plenty of reason to be optimistic,” on vaccine developments, the strategists said. The distribution “will catalyze the next leg lower in the structural USD downtrend we expect.”(Adds comments from Citigroup’s Tse in fifth paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
- Bloomberg
For FX Contrarians, Much of Dollar Weakness Has Been Priced In
(Bloomberg) -- The dollar’s resilience after falling to a two-year low is surprising forecasters who had predicted that a breakthrough on a coronavirus vaccine and a Democratic victory in the presidential election would give renewed impetus to the currency’s slide.The Bloomberg Dollar Spot Index has recovered from its weakest levels of Monday, when it sank to the lowest since April 2018 after reports of positive vaccine developments. The view for months has been that a vaccine-fueled rebound in global growth would pave the way for investors to seek better opportunities outside the U.S., undermining the dollar. On top of that, a presidential win by Democrat Joe Biden was seen as one stepping stone toward big fiscal stimulus.But contrarians say that much of the dollar declines that were predicted may have already occurred. The currency is down about 11% from its peak in March and has fallen in six of the past seven months. Brad Bechtel, a strategist at Jefferies, says the rebound Monday strengthens his view that the currency isn’t about to enter an extended descent.“I know that sounds crazy at these levels, but I just don’t see scope for a protracted bear market in the USD,” he wrote in a report Tuesday, noting that the euro could drop to $1.14, from about $1.18 now. “If things turn really good again in the economy then the USD ‘smile’ theory kicks in and the USD outperforms.”That theory posits that the greenback will advance as a result of either U.S. growth exceeding that of other nations, or during risk aversion. U.S. economic figures have been improving, with labor-market and manufacturing gauges beating expectations.TD Securities expects that over the next couple of weeks, the market will be quicker to take profits on dollar shorts, rather than building new positions. That’s because investors have already “priced in quite a bit of good news” from the election and the potential vaccine, said Ned Rumpeltin, a strategist.And while the Federal Reserve’s accommodation may put downward pressure on the dollar, Bechtel said major central banks and governments in Europe and Asia are also likely to add stimulus, stemming strength in their currencies.Still, Deutsche Bank AG, which closed a bearish position on the currency last week when it looked like the U.S. election was going to be contested, reinstated its call Monday for a weaker dollar. Strategist George Saravelos said the vaccine news is “as good as it gets,” and he sees “plenty of potential for the current dollar weakening trend to continue,” especially against peers such as commodity-linked and emerging-market currencies.According to Stuart Ritson, a money manager at Aviva Investors, the dollar remains expensive and “structural headwinds” including the U.S. twin deficits will fuel its continued decline. Pfizer Inc.’s vaccine news and a pick-up in global growth will also “add pressure on the dollar,” the Singapore-based Ritson added.At least for now, a rapid dollar decline seems to have been averted.“It is time to carefully lean against some of the USD’s recent weakness,” said TD’s Rumpeltin. His team selected a long-dollar bet versus the Norwegian krone as its trade of the week.(Adds Aviva’s view in ninth paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
