[ad_1]
By Tommy Wilkes and Ritvik Carvalho
LONDON (Reuters) – This was supposed to be the beginning of a dollar retrenchment. Instead, investors are reducing these bets as central banks around the world emulate central banks around the world, keeping the greenback's interest rate premium intact relative to other currencies.
The dollar gained 4.4% in 2018, its best year since 2015, as strong economic growth allowed the Fed to raise rates several times, even though most other developed economies were struggling with a slowdown. .
Traders began trading at the end of 2018 to bet that the dollar was heading towards a decline from the 18-month highs, as the Fed approached the end of its three-year policy tightening cycle. Many felt that he would also stop reducing his balance sheet.
Other central banks, from the European Central Bank to Australia, have been ready to kick-off rates.
But after falling in December and January, the dollar has recovered and has risen 1% so far in February. Compared to some currencies such as the Australian dollar, it jumped more than 2%.
The reason? Economic momentum appears to be worse elsewhere, forcing policymakers to abandon, postpone or relax their plans for policy tightening.
So, even though the Fed has confirmed its regime change this week in the minutes of its last meeting, it looks like the dollar will continue to benefit from a yield advantage over its rivals.
"The dollar's resistance this year surprised some," said Richard Turnill, investment strategist at BlackRock.
"Yet, the same factors that keep the Fed in abeyance – slowing global growth and tightening financial conditions – are pushing other central banks to adopt a more dovish stance."
Chart: G3 central bank badets, change from one year to the next (https://tmsnrt.rs/2Em8s8p)
SUPPORT IN DOLLARS
Take for example the European Central Bank. Bets on the rate hike in 2019 have been drastically reduced and many believe that the ECB is about to launch a new round of stimulus via cheap bank loans.
Japan said it could inject more stimulus if needed, while Australia and Sweden said they could rethink the planned rate hikes.
Chart: Differences in Dollar Performance, Cumulative Performance (https://tmsnrt.rs/2U07GmC)
Roger Hallam, Director of Currency Investments at JP Morgan Asset Management, notes that the euro is widely expected to appreciate in 2019 from 1.13 USD to 1.20 USD currently. But the slowdown in trade and signs of higher-than-trend US economic growth could hamper the creation of the single currency, he said.
It is crucial that the market should also adjust more to a more dovish ECB, said Hallam, adding that "relative interest rate differentials are now more likely to favor a favorable US dollar in the months to come ".
Even though US interest rates do not continue to rise, they compare favorably with sub-zero rates in the euro zone, Japan, Scandinavia and Switzerland. Australian interest rates are 1.5%.
The dollar has weakened this year against emerging markets, where higher yields are attracting investors, but there are signs that the cycle of rising rates in developing countries has also stopped. India has lowered its rates this month and is expected to reduce it again in April.
In terms of global liquidity, the collective balance sheets of the Fed, the ECB and the Bank of Japan declined in late 2018 for the first time since 2015.
Chart: dollar estimates (https://tmsnrt.rs/2TXhu0F)
Although this is mainly the case of the Fed, the decline should slow down – the US central bank confirmed this week that it will announce soon its intention to end the reduction in the size of its balance sheet.
Steve Donze, senior strategist at Pictet Asset Management, predicts that the shrinking of the Fed will end at the end of 2019 with a balance of $ 3.75 billion, and growth consistent with GDP.
The minutes of the last Fed meeting suggest, however, that the central bank is not as accommodative as the markets think. Shared views by Fed policymakers suggest that the central bank may not have ended yet its three-year campaign to raise rates, but simply suspended it.
"The market has been anticipating all the complexity that we can expect from the Fed, and the market will have to correct itself and this should support the dollar," said Andreas Koenig, Global Head of Foreign Exchange at Amundi Asset Management. Europe's largest fund manager.
Investors, however, do not expect huge gains from here. In a weighted manner, the real effective exchange rate of the dollar already exceeds the average of the last twenty years, which potentially limits a further increase.
Chart: Speculative positioning in dollars (https://tmsnrt.rs/2TUOS8d)
Speculators, meanwhile, have reduced their positions in dollars but they remain long net the greenback by a wide margin.
(Edited by Sujata Rao and Toby Chopra)
Source link
