Asian in­vestors, Obama and the Dol­lar rally

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.