HSBC bullish on US dollar outlook

One of the world’s biggest dollar bulls is sticking to his guns as the US economy powers ahead and dangles some of the highest interest rates versus Europe in history.

Wall Street’s “America First” playbook in 2019 will pack more punch, boosting the greenback along the way, according to David Bloom at HSBC Holdings.

“The market is perpetually looking for a US slowdown, and it’s just not happening,” Mr Bloom said in an interview in Madrid. “Why wouldn’t you buy the dollar? Even if the world goes risk-off, and the Fed has to cut rates, the dollar – and the yen – will win.”

Wall Street banks are divided on the direction of the dollar for 2019 after its surprising strength this year upended investment strategies across the globe. Morgan Stanley’s Global Head of FX Strategy Hans Redeker said the dollar has peaked, pointing to investment flows and what he sees as a slowing economy. Goldman Sachs also says it will be tough for the greenback to gain. At HSBC, however, the chief currency strategist is seeing vindication for his bullish stance held since April, after the dollar advanced about 6 per cent against the euro.

Mr Bloom reckons the dollar will strengthen to $1.10 per euro by the end of next year – a 3.6 per cent upside from current levels for the world’s most-traded pair.

That’s a weaker euro forecast than any of the 19 estimates tracked by Bloomberg. Mr Bloom is also more dollar-bullish than consensus across a slew of FX pairs, including the South African rand.

Investors are set to gobble up US assets anchored by a robust business cycle that is sustaining rate hikes, while haven demand may fuel the greenback should traders turn skittish, he said.

Data this week underscores the uphill battle for traders rooting for a rebound in the euro. German output contracted in the third quarter while investors surveyed by Zew showed little optimism about the prospect of a pickup – spurring 10-year German real yields to 2018 lows.

“It is this theme of ‘divergence’ between the US and everywhere else – now evident since the first quarter of 2018 and reinforced in the recent data – that has driven our strong, steady view for the dollar,” Thierry Wizman and Gareth Berry, strategists at Macquarie, wrote in a note.

Meanwhile, inflation-adjusted US rates over Europe are at some of the highest levels in history, with nominal yields outpacing other Group of 10 nations. All that has helped the dollar rise almost 4 per cent against 10 of its peers this year.

Traders in three-month options have increased their dollar bets versus a basket of six major currencies, risk reversals show.