Asian investors, Obama and the Dollar rally
Now that 2016 has arrived, the US dollar is expected to strengthen while other currencies weaken. Presently, we are witnessing one of the longest rallies of the dollar in over 45 years. And now, following three years of strong gains for the USD, analysts are expecting that the US dollar will once again beat out other currencies in 2016. Some 70% of the G10 nations are likely to see declines of their currencies against the USD before the end of the year, according to Bloomberg. And there is certainly substantiation of this projection by way of the Federal Reserve Bank’s desire to hike interest rates throughout the course of the year, while the central banks of many other countries will be looking to reduce interest rates. This is especially true in countries like New Zealand and Australia which have recently featured higher interest rates which have been driving their currencies stronger against the USD. In fact, such is the strength of the current dollar rally that it mirrors the prolonged period of strength enjoyed by the Clinton and Reagan presidencies. It is apparent, however, that the current rally during the Obama presidency is being driven by largely divergent policies between the Fed and other central banks around the world, notably the ECB.
This period in US economic history is one of the best ever for the dollar. It marks the third most profitable period in history. Based on analysts’ projections, the USD will likely surge against most of the world’s top currencies with the exception of the British pound (GBP), the Canadian dollar (CAD) and the Norwegian kroner (NOK). The USD is likely to stage its strongest gains against the Swiss franc (CHF), the New Zealand dollar (NZD) and the Australian dollar (AUD). According to Bloomberg, the New Zealand dollar is expected to decline as much as 8% against the USD, the Swiss franc is expected to decline up to 6% against the USD, the Australian dollar at just over 5% and the Danish krona at 5%. Other currencies that will likely depreciate against the USD include the Euro (-3%), the Japanese yen (-3.5%) and the Swedish krona (-5%). The big gainers for the year will likely be the Canadian dollar at (+4%), the British pound (+ 3%) and the Norwegian krone (+1.5%). Besides the current rally, the only other notable dollar rallies took place in the 1980s under the Reagan administration and the 1990s under the Clinton administration.
The sharp spike in dollar gains in the 1980s has been unsurpassed under any other presidency. The current Obama dollar rally is significant in that it comes off one of the worst periods in recent history – the 2008/9 global economic crisis. The US policy of quantitative easing was one of the most dramatic and significant monetary policy measures adopted under any presidency. According to the data, the Obama rally officially began back in 2013 after the Fed began cutting back on the QE policies it enacted. Economists, traders and analysts were hopeful that increasing interest rates would soon follow. The reason for a strengthening of the USD in this particular situation was the expectation that dollars would be more valuable relative to other currencies. With higher interest rates in the US, more dollars would be demanded and more foreign currency would be exchanged for greenbacks. On Wednesday, December 16, 2015, the Fed made good on its promise to hike interest rates when it raised the rate by 25-basis points. This resulted in a 0.50% interest rate in the US – the first rate hike in nine years.
A contrarian perspective is held in Asia about the dollar’s prospects for the year. Since the USD has been rallying for three years, various high-level money managers are advising their clients to prepare for the dollar’s decline this year. UBS Group is of the opinion that the dollar will struggle to appreciate beyond its current levels in 2016. In other words, the upward trajectory of dollar growth is capped. Fund managers at the world’s premier private bank believe that the modest interest-rate increases implemented by the Fed will be insufficient to warrant further investment in the USD as their currency of choice. Economic analysts are anticipating that a gradual policy of quantitative tightening will allow the currency to appreciate by 5% to $1.05 against the euro by Q3 2016. In 2015, the USD made sharp gains against the euro, by advancing 10%. This year, however, the dollar will strengthen less than 4% against the Japanese yen, a market downturn from the 10% appreciation experienced between 2013, 2014 and 2015. There is also a caveat associated with the rate hike in the US: Gains for USD investments are unlikely to move according to givens such as a policy of gradual interest-rate hikes. The more likely scenario is that dollar purchases would be made by surprises in the financial markets.
In Japan, there is a degree of uncertainty as to whether the Bank of Japan (BoJ) will approve an expansion of its quantitative easing policy in 2016. Europe already implemented one of the biggest QE programmes in history when it purchased assets valued at over EUR 1.1 trln with an additional 60 bln per month for a six month extension. The other policy measure adopted by the ECB was the 10-basis point decrease in the deposit rates to -0.30%. Since these measures were less than what was anticipated by analysts and traders, the euro rallied against the dollar.
However, Fed action will likely counteract the effects of the ECB policy to a degree and allow the USD to gain ground. But there are many signs that the USD is losing ground against major Asian currencies, with the Singapore dollar gaining 1.1% in Q4 2015, and the Indonesian rupiah gaining 7.3%. There is a feeling that the Fed will be unable to tighten monetary policy several times without the global economy improving. For the most part however, the big gains are going to come from the USD vs Emerging Market currencies, but beyond that it’s uncertain.