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SINGAPORE – The US dollar is on the verge of weakening further as the market believes geopolitical risks subside after the election and the next stimulus package is likely to be smaller than expected, analysts said.
Citi Private Bank strategists predicted a weaker dollar to come, as a Biden administration would reduce uncertainty in international trade policy.
“President-elect Biden’s victory means a return to more conventional governance. As the president’s province, this will bring about a major change in the way foreign policy is conducted. Alliance building will return. “Tariff threat first” negotiating tactics will end, “the bank’s chief investment officer David Bailin and Steven Wieting, chief investment strategist and chief economist, wrote in a memo released Monday.
This will benefit a large part of the global financial markets, especially in emerging markets, they said.
Perhaps the greatest clarity after the election is on global trade. US foreign policy will enter a more predictable phase without escalating tariff threats. We believe the falling US dollar and rising emerging markets are very likely, ”they wrote.
On Friday, the US dollar index, which tracks the greenback against a basket of its peers, hit a low of 92.456 – its lowest level since September 2. Following weekend projections that Joe Biden won the US presidential election, the dollar continued to dip sharply towards 92,162 on Monday.
In Asia, trade on Tuesday, however, jumped on hopes of the Pfizer vaccine to last at 92,813 – but still below the 94 level seen earlier this month.
“What was probably more surprising… after the election result… was not only how we saw (the offshore Chinese yuan) and Asian currencies benefit… but we saw a much larger sell-off of the dollar – overall the currencies of the G10, “Adam Margolis of JPMorgan Private Bank told CNBC’s” Street Signs Asia “on Monday. This notably includes certain emerging currencies, he added.
Asian currencies have strengthened in the past few days, with the offshore Chinese yuan hitting a 28-month high on Monday and further appreciating for the last trade to 6.61 on Tuesday morning. The Japanese yen hit an eight-month high of 103.18 against the dollar on Friday, according to Reuters.
Margolis, the bank’s head of foreign exchange, commodities and rates, pointed out that Biden’s victory reduced the overall geopolitical risk premium, and that it had “ripple effects” outside Asia.
He added that the theme at stake was to continue to look for “opportunities” to reduce the overweight to the dollar.
“I think it’s important, it’s this idea that the prospect of a little weaker fiscal stimulus going forward has led at least initially to lower yields,” he said. “I think that puts the burden on the Fed, emphasizes the importance for them to communicate effectively that we are going to have a period of prolonged negative real rates.”
As rates fall, it affects the US dollar, as investors can shy away from dollar-denominated assets – which generate lower returns.
Brokerage Phillip Futures also said in a note Monday that the dollar could weaken if the second stimulus package is smaller than expected.
“An increasingly bearish picture is unfolding for the US dollar… on signs that printing Fed money rather than government spending could be deployed to support the economy,” he said .
A divided Congress – with Republicans controlling the Senate and Democrats holding the House – can mean a small stimulus package. This increases pressure on the Fed to step up its bond buying program and other economic support policies and, in turn, puts pressure on the dollar, Phillip Futures said.
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