ADVERTISEMENT

Wall Street Divided on Dollar and Whether It Found a Floor

Analysts are divided on where the dollar is heading as major central banks combat the impact of the coronavirus.

Wall Street Divided on Dollar and Whether It Found a Floor
A pressman inspects a stack of uncut sheet of $1 notes at the U.S. Bureau of Engraving and Printing in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

(Bloomberg) -- Wall Street analysts are divided on where the dollar is heading as actions by major central banks to combat the impact of the coronavirus upend markets.

The greenback fell to a fresh six-month low against the yen Friday as investors wager the Federal Reserve and policy makers in other nations are likely to introduce additional rate cuts or announce stimulus packages to support global economic growth. While strategists at Canadian Imperial Bank of Commerce and Deutsche Bank say interest-rate cuts will bring more losses for the U.S. currency, JPMorgan Chase & Co. and Goldman Sachs Group Inc.’s forecasters sees the greenback benefiting from haven demand.

The dollar’s recent decline has vindicated many forecasters who came into this year saying the currency would weaken. It advanced in the first two months but everything changed when expectations about the Fed lowering rates to combat the virus grew. And the decline has only worsened after Chair Jerome Powell said the central bank would be willing to do more to support growth.

Bipan Rai, North American head of FX strategy at CIBC, said the 50-basis-point rate cut Tuesday cemented his bearish views on the greenback as dollar-denominated assets lose appeal.

“The dollar’s reputation as a developed market ‘high-yielder’ and a risk-off haven has been dented materially,” he said. Rai recommends going short the dollar versus the euro and yen in the short-term.

Deutsche Bank’s George Saravelos, another bear on the U.S. currency, told clients Thursday to “stay short dollar” against the euro, yen, and Swiss franc. Saravelos said the shrinking yield advantage will lead to “bigger damage” as foreign investors who had been seeking carry returns would sell the greenback.

Wall Street Divided on Dollar and Whether It Found a Floor

The Bloomberg Dollar Spot Index dropped 0.4% Friday at 10:23am in New York. It earlier touched the lowest level since Jan. 17.

Others including JPMorgan, however, think the downside is limited. History shows that episodes that require broad synchronized global easing tend to be dollar-supportive, according to strategists Daniel Hui and Paul Meggyesi.

In the recent past, there have been four episodes of coordinated central bank easing including the ones in October 2008 and November 2011, they said. On Nov. 30, 2011, the Fed cut the cost of emergency dollar funding swap lines as part of a globally synchronized response to ease financial market pressures from Europe’s debt crisis and the Bloomberg Dollar Spot Index went up 1.7% in December that year.

They remain long haven currencies, including the dollar, with the expectation that rate cuts won’t fix the virus’s short-term economic impact.

Goldman Sachs concurs with JPMorgan that the currency’s haven status is intact.

“It will likely be difficult for risk-sensitive currencies to outperform USD if markets remain volatile, as we expect,” Goldman Sachs FX strategist Zach Pandl wrote Thursday. “We do not anticipate dollar weakness against a much broader set of currencies just yet.”

Pandl added that while the yield gap between the dollar and the euro or the yen will narrow because the European Central Bank and Bank of Japan have little room to cut rates, some developed and most emerging market central banks do have room to cut -- which will help to prevent dollar depreciation.

To contact the reporters on this story: Jack Pitcher in New York at jpitcher2@bloomberg.net;Susanne Barton in New York at swalker33@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Debarati Roy, Nick Baker

©2020 Bloomberg L.P.