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Dollar touches lowest level in over two years

Nuveen Head of Fixed Income Strategy Tony Rodriguez joins Yahoo Finance’s Akiko Fujita to discuss the outlook on the U.S. dollar and why treasury yields are slipping.

Video Transcript

AKIKO FUJITA: Low yields and mixed economic data in the US, pushing the US dollar to a two year low, even as we've seen the major indices hit record highs. The dollar index is down more than 4% year-to-date. Let's bring in Tony Rodriguez, he is Nuveen Head of Fixed Income Strategy. Tony, let's start with where we've seen the greenback. Certainly, weakness coming through over the last several months. Is this really all about the Fed and liquidity?

TONY RODRIGUEZ: I think it is about the Fed liquidity, and that is driving the low rate environment, which is clearly making investors no longer look at the treasury market as that attractive. We certainly saw a very quick bounce back on the dollar right around the crisis period with a standard flight to quality to treasuries and the dollar. But once we saw the massive amount of stimulus coming in from the Fed and from fiscal authorities, that made people believe that maybe we'd see what's proving so far to be a very short, very deep, but very short recessionary period. That then is now transitioned to where the unattractiveness of rates, the massive amount of stimulus that the Fed is providing makes the dollar unattractive relative to other currencies.

AKIKO FUJITA: I mean, having said that, we're still expecting additional stimulus once Congress gets their package in order there. I mean, how much more downside can we expect for the dollar given the additional stimulus that's likely to come from Washington as well as the Fed?

TONY RODRIGUEZ: Sure, we think that it's a modest amount, and we do think that the majority of the move is now behind us, but we do think we will continue in the same direction. Certainly, if we get the, you know, what we expect to be the stimulus package. Clearly, it hasn't gone as smoothly as has anyone has hoped, particularly those who are no longer receiving the supplemental unemployment benefits. But we do expect that they'll reach some sort of compromise. Now it looks like it might be pushed out into September, but nonetheless, that should then kind of put the dollar back on the course that it's been, which is just a moderate amount of weakening from here.

AKIKO FUJITA: Tony, let's talk about where we expect to see the Fed. I mean, the FOMC minutes coming out tomorrow. You know, when you look back to the July meeting, no new policy action taken at the time, but the central bank's starting to wrap up the strategy review they've been conducting over the last year. How much more clarity are we likely to get in the Fed's guidance or its inflation framework?

TONY RODRIGUEZ: Sure, I think that in the minutes we may see some information about a discussion about the framework but no actually conclusions. Though I do think that we believe Nuveen that at the September meeting, we expect to hear kind of a little bit more of the actual results of that framework review, and we do expect it to move in the direction of more of an average inflation objective rather than a very strict 2% inflation objective, and therefore, potential tightening of monetary conditions the minute you exceeded that 2%. I think now you'll see more of an averaging framework allowing them to live above that if, in fact, we get there, which at Nuveen, we're not expecting that we're going to pierce that 2% level anytime soon.

AKIKO FUJITA: And Tony, I'm looking at some of the key risks that you've highlighted in your notes. Certainly, the potential of another economic shutdown as a result of the virus is one that has kind of been lingering, but we've also got the US-China tensions. These escalations that have continued particularly on the issue of tech and national security, and yet, it seems like if you look at the market reaction, much of it has been a lot more-- there hasn't been as much of a reaction. So long is that trade, the phase one trade deal remains intact. I mean, is that kind of what you think we should be looking to? Is all this other stuff that we've been hearing about, is that noise right now?

TONY RODRIGUEZ: I think at the moment as we head through the election, we can maybe try to look at it as noise. I think right now the rhetoric is very election-centric. Both sides happen to find China's a very easy target to bash, and I think China is kind of stepping back and waving til post-election before they do anything, for example, retaliatory or significant from that perspective. I think once we get post-election, then depending on who ends up in the White House and how the rhetoric may or may not change, that's when I think the concern might actually increase. Because then China would have to kind of reset to what the administration is and the new, you know, from 2021 and beyond, and that's where we think there could be some problematic relations that could affect the market.

AKIKO FUJITA: Tony Rodriguez, Nuveen Head of Fixed Income Strategy, appreciate your time tonight.