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The US dollar is expected to depreciate over time in 2019, despite its short-term strength, supported by favorable US interest rates. UU And market volatility, as predicted by UBS in its 2019 Year Ahead report.
The forecast report presented by the Chief Investment Office of UBS Global Wealth Management (GWM) indicates that the dollar has remained overvalued thanks to "margins marked by positive short-term interest rates" compared to other countries, such as USA UU The Federal Reserve continued to increase rates.
However, the report pointed out that the benefit of the currency could possibly be reduced next year, as the dollar will have bearish pressure both domestically and geopolitically.
EDF FEDURE MOVES AT DOLLAR WEIGHT
The Fed is expected to approach the end of its rate hike cycle in 2019 and the US budget and current account deficits. UU They will put the dollar on a downward trajectory, said the Swiss multinational investment and financial services company.
Last week, the Fed considered for the fourth time this year to raise interest rates in December, saying that "it would probably be justified soon enough," according to the minutes of the meeting from 7 to 8 November. Federal Open. Committee, which sets the interest rates.
However, the Federal Reserve pointed out that it would consider changing the expression "more gradual increases" in the federal funds rate in its future returns, which raised concerns about the duration of the quarterly increases in central bank in 2019.
Geopolitically, despite persistent uncertainty about the trade tension between EE. UU And China has supported the demand for the dollar as a safe haven, while Europe and Japan are standardizing their policies, which, according to UBS, would reduce the comparative advantage of the greenback.
Mark Haefele, Investment Director at UBS GWM, said the other currencies were undervalued as demand for the dollar as a safe haven rose due to continued market volatility. However, potential variations in US interest rates. UU They will affect the dollar in the next year.
"I think what we are saying, is that in the short term, the trade tension (American and Chinese) could slightly strengthen the strength of the dollar from now on, but many of the rate differentials of Interest rates and higher yields (short-term treasury bonds) In the United States, prices are now, therefore, over time, we expect a fall in the overvalued dollar, "said Haefele.
The US dollar extended its losses at the last trading session on Tuesday, in the form of a reverse yield curve of US Treasury bonds.
Yields on two-year bonds and three-year bonds outperformed five-year yields for the second consecutive day on Tuesday, creating a reversal in the yield curve, which is generally considered a precursor to the economic slowdown.
In addition to the adverse impact, UBS also found a "limited additional increase" in the future of 10-year US Treasury bonds.
Haefele said the quantitative easing of the US central bank. UU This would also worsen the curve by reducing yields on US government bonds. UU
"The investment is not a predictor of a recession in general, as there may be several months of shortage before the recession occurs." Second, in this cycle, the quantitative easing of the central bank removes the longest part of the recession. performance curve, maybe 100 basis points … So it smooths the curve, "he explained.
"You can not just look at this yield curve and compare it with the past, because the central bank has reacted so differently, this forced flattening may persist as long as there will be no recovery of inflation, "he added.
STANDARDIZATION POLICY IN ANOTHER PART OF THE WORLD
In the future, the strength of the dollar will fall and depreciate against other major world currencies. A broad interest rate differential will appear between the dollar and other currencies such as the euro, the Swiss franc and the Japanese yen, according to reports from central banks of the aforementioned countries, which normalize their monetary policies.
"The European Central Bank (ECB) will only begin to normalize interest rates, which will result in reduced spreads and a reduction in the dollar's advantage," USB said in its report.
Europe has also tried to promote wider global use of its currency. The European Commission on Wednesday issued proposals to improve the role of the euro in international payments and as a reserve currency, particularly in the financial and commodities markets, as the withdrawal of the United States from the Iranian nuclear deal had forced European companies to halt their relations with Iran.
Similarly, the National Bank of Switzerland, according to UBS, will also raise its interest rate after a first rate hike by the ECB in 2019, in the midst of global uncertainty, which will push the Swiss franc against the dollar.
In other parts of Asia, given that the Japanese Prime Minister has depreciated the Japanese Yen (JPY) in order to support the country's economy, the currency is currently undervalued.
The Bank of Japan (BOJ) plans to withdraw its monetary stimulus as inflation returns to normal. In such a status quo, the Swiss financial institution felt that the JPY "could begin to strengthen again".
The projected 10-year increase in Japanese government debt yields in 2019 is another boost for the JPY, "as the BOJ begins to slowly normalize its monetary policy," the report said.
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