Panicking Doves Add Fuel to Dollar's Longest Rally in 3 Years

(Bloomberg) -- The dollar’s relentless rally may find another gear as central banks around the world take heed after the Federal Reserve’s dovish pivot.

The greenback has gained every trading day since the Fed’s Jan. 30 decision, when Chairman Jerome Powell said the case for further rate hikes has weakened. The Fed’s shift, after it projected in December that two 2019 rate hikes were likely, inspired other global policy makers to dial back policy-tightening expectations -- including the Reserve Bank of Australia and the Bank of England.

Panicking Doves Add Fuel to Dollar's Longest Rally in 3 Years

As a result, BNP Paribas Asset Management changed course on the dollar, after calling for the currency to weaken over the course of 2019. The $646 billion money manager now expects that the greenback may gain 5 percent in the first half of the year as weakening global growth prevents other central banks from hiking.

“The dollar’s not weakening, and the reason for that is that the Fed is just the beginning, in the sense that all other central banks are most likely going to become dovish,” said Momtchil Pojarliev, head of the currencies group.

The greenback climbed 0.5 percent Monday to recoup its year-to-date losses, and is enjoying its longest winning streak since January 2016. The currency’s surprising strength has upended forecasts across Wall Street, with firms such as Morgan Stanley and Nomura having called for dollar losses. It’s also put a chill on U.S. corporate earnings.

While the Fed’s about-face would typically vindicate those calls, the darkening outlook for the dollar’s peers should support it in the days ahead, according to Kit Juckes, a Societe Generale SA global fixed-income strategist. The euro is a case in point: A lurch lower in German yields and sputtering European growth saw the common currency touch its lowest level since November on Monday.

“The problem for dollar bears is that there is a chronic shortage of currencies to like,” Juckes said. “Lower bund yields, not to mention weak growth, political uncertainty and Brexit, make a good set of reasons to hate the euro as much as you hate the dollar.”

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