Views split on greenback as funds weigh US prospects

NEW YORK • The most popular currency trade at the beginning of the year has splintered as Wall Street takes to opposing sides on the fate of the greenback in the world's recovery from the coronavirus pandemic.

JPMorgan Asset Management and T. Rowe Price see the dollar weakening as US economic exceptionalism wanes, while PineBridge Investments weigh in on dollar strength. Currencies from the euro to the Brazilian real - which suffered in the first quarter - have attempted rallies this month, leaving the greenback sitting at a closely-watched technical crossroads.

"You have that idiosyncratic US rates outperformance story being offset by the global cyclical upswing and by expensive valuations on the dollar," said Mr Ian Samson, a fund manager at Fidelity International in Hong Kong, who is long the currency against the euro. "We see significant crosswinds blowing the dollar in different directions."

While most on Wall Street called for a weaker dollar in January, the world's reserve currency went on a run that left speculative funds scrambling to cover US$30 billion (S$39.8 billion) of net short positions as Treasury yields rose and expectations of rate hikes were brought forward.

That trade soured this month, with the Bloomberg Dollar Spot Index slipping almost 2 per cent. And this week's policy assessment by the Federal Reserve, which has held firm against hawkish expectations, could lend weight to bears.

At the crux of dollar forecasts is expectations for the pace of recovery in the world's biggest economy.

As the world strives to break free from the bruising economic effect of coronavirus restrictions, the United States has inoculated more citizens than any other country, giving it an edge in the race to re-open.

Coupled with the Biden administration's multitrillion-dollar fiscal stimulus and a Fed that is allowing inflation to overshoot, it is spurring the likes of PineBridge Investments to predict more dollar gains.

"US Treasury yields could see another leg higher once we see some inflation come back," with their premium over peers supporting the dollar, said portfolio manager Omar Slim at PineBridge in Singapore. "Our view is that the dollar will retain a strengthening bias this year."

Ten-year US yields surged more than 80 basis points this year to 1.77 per cent in March, the highest since before Covid-19. While the benchmark retreated to 1.56 per cent last Friday, it remains well above this year's low of around 0.90 per cent.

"Positive US data might very easily kick-start a dollar rally again," Commerzbank currency strategist Thu Lan Nguyen wrote in a note last week. "So for now, US dollar bears should make sure they don't get excited too soon."

But not everyone is convinced the US will continue outpacing its peers. For London-based strategist Thushka Maharaj at JPMorgan Asset, the US' exceptionalism is set to fade as other nations catch up on vaccine roll-outs and economic re-openings in the second half of the year.

She is keeping tabs on developed markets such as Europe, the UK and Japan, and sees the euro outperforming the dollar in the medium term.

Signs abound that this trend is underway.

Coronavirus cases are rising in all regions except Europe, the World Health Organisation said last week.

The euro has climbed about 3 per cent from a four-month low in March, and broke through the key US$1.20 level last week.

Some favour other currencies to best the greenback. T. Rowe's strategist Thomas Poullaouec sees more gains for Australia's risk-sensitive dollar as China's economy rebounds from the pandemic and demand for commodities rise.

Aberdeen Standard Investments' Edwin Gutierrez is watching for opportunities to boost exposure to riskier developing currencies as "the rest of the world catches up on the vaccine roll-out". The Brazilian real, Indian rupee and Colombian peso - which have been hit as the virus raged across those countries - stand out for the head of emerging-market sovereign debt in London.

In the meantime, vocal bears continue to warn about long-term headwinds for the dollar.

"Beyond the near term, we continue to see a structurally negative outlook for the US currency," wrote Goldman Sachs strategists including Zach Pandl in a note last week. "The dollar is still substantially overvalued."

BLOOMBERG