Currency strategists say growing fiscal risks, softer U.S. economic data and uncertainty over Federal Reserve policy could intensify pressure on the dollar despite its strength this year. Weaker inflation and jobs data are already prompting investors to trim bullish dollar positions, while mixed Fed signals and the U.S.-Japan yen intervention add further downside risks.
Growing fiscal risks, softer economic data and uncertainty over Federal Reserve policy could intensify pressure on the U.S. dollar despite its recent strength, currency strategists say. The U.S. Dollar Index is up 1.15% year-to-date, having notched a 52-week high of 101.80 on June 24. It stood at 99.4 as of 5:32 a.m. ET on Wednesday.
Higher U.S. bond yields helped support the dollar this year by attracting capital into dollar assets. But Charu Chanana, chief investment strategist at Saxo, said higher Treasury yields do not necessarily support the dollar if investors believe the increase reflects fiscal risk, heavier government borrowing or persistent inflation, rather than stronger growth or tighter Fed policy. According to Saxo: "investors should increasingly ask why U.S. yields are rising."
Soft U.S. data weighs on dollar bulls
Softer U.S. consumption, inflation and employment data have caused investors to reassess interest-rate expectations and reduce some bullish dollar positions, according to Societe Generale. Kit Juckes, the bank's chief FX strategist, said recent weaker inflation and employment prints have reduced market expectations for higher U.S. rates.
As a result, long dollar positions are being cut back in a thin summer market, which he said could drive the dollar index lower or leave it drifting into a 95-100 range for the rest of the year.
Mixed Fed signals add another risk
George Saravelos, global head of FX research at Deutsche Bank, said uncertainty about the Fed's inflation reaction function adds another potential negative for the dollar. He pointed to mixed signals from Fed Chair Kevin Warsh over the central bank's inflation target and toolkit, which he views as dollar-negative.
Saravelos also argued that the Fed's FIMA repo facility, used in the recent U.S.-Japan intervention to support the yen, ultimately has the same economic impact as quantitative easing. He said a sharp increase in the facility's size would amount to an indirect form of Fed monetary financing of Treasuries, adding another dollar-negative factor.
Why a stock sell-off may not hurt the dollar
Elias Haddad, global head of markets strategy for foreign exchange at BBH, said a stock market correction may pose less of a dollar risk than some assume. BBH's analysis of Treasury data shows foreign purchases of U.S. stocks hit $920 billion in the 12-month period through June, more than triple the $294 billion in foreign Treasury purchases over the same period.
Haddad said a broad equity sell-off may instead push foreign investors back into Treasuries, which still underpin the dollar's safe-haven appeal.
Source: CNBC
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