Templeton's Beck Sees Dollar Near 125 Yen on `Political Boredom'

(Bloomberg) -- The dollar is set to strengthen toward 125 yen and approach parity with the euro in what is likely to be a year of “political boredom” compared with the shocks of 2016, according to Franklin Templeton Investments.

The focus will return to the economy, principally the policy divergence between the Federal Reserve and central banks in Europe and Japan, which will help propel the greenback, said John Beck, a London-based director of fixed income at Franklin Templeton, which oversees $720 billion.

The anti-establishment upsets of 2016, namely Britain’s vote to leave the European Union and the election of Donald Trump as U.S. president, are unlikely to be repeated in elections to be held in France, Germany and the Netherlands this year, he said. Anti-euro candidate Marine Le Pen is unlikely to become the next French president, while if German Chancellor Angela Merkel fails to win a fourth term she will probably lose to a rival from the political center, he said.

“If 2016 was the year of the political shock, then 2017 may be the year of looking at basic economics,” Beck said in an interview in Singapore on Friday. “Higher rates will probably support the dollar.”

The dollar last traded at 125 yen in mid-2015, when it reached 125.86, the strongest since 2002. The U.S. currency has not traded at parity with the euro since December 2002. The greenback was at 113.31 yen and $1.0620 per euro at 6:31 a.m. in London on Tuesday.

Dollar Rally

The Dollar Index -- which tracks the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona -- has risen in each of the past four years as the Fed has resumed raising interest rates while central banks in Europe and Japan have maintained record currency weakening stimulus. The gauge, known as the DXY, fell 2.6 percent in January as Trump suggested some countries were unfairly holding down the value of their currencies. It climbed 0.9 percent last week as he promised a “phenomenal” plan to overhaul U.S. business taxes.

“The market kind of oscillates between what I call ‘Good Trump’ and ‘Bad Trump’,” said said Eric Stein, Boston-based co-director of global fixed income at Eaton Vance Corp., which manages about $350 billion. “I’m kind of a mild dollar bull in aggregate.”

While the greenback is set to strengthen versus the Chinese yuan, euro and yen, it’s unlikely to rally the way it did in 2014 and 2015 as “valuation levels aren’t there,” he said.

The dollar’s strength will only start to cause problems for the world’s biggest economy should the Dollar Index rise to around 110, from its current level of about 100, Franklin Templeton’s Beck said.

Higher Yields

Treasury 10-year yields have risen more than a percentage point from last year’s lows set in July as an improving economy spurred the Fed to resume raising rates in December. The yield will climb to 2.75 percent this year and the Fed will probably boost rates about two times, Beck said. The yield was at 2.43 percent on Tuesday.

“We go from the perspective that if it is an economic outcome in 2017, rather than a political outcome, then the U.S. economy triumphs and you get a modest bias toward upward yield,” Beck said.

Beck said he would consider buying the pound if it weakens to $1.15. Sterling was at $1.2525 Tuesday after tumbling 16 percent last year, the worst performer of 10 developed-market currencies, as Britons unexpectedly voted in June to leave the EU.

“If there is a Brexit disaster then the pound will go weaker,” he said. “But on fundamental grounds, the pound is probably already cheap.”

Franklin Templeton is “neutral” on French bonds relative to the benchmark it uses to track its performance, though it will buy the securities on any “big selloff,” Beck said. Concern that Le Pen will triumph in the elections roiled financial markets last week, increasing the extra yield investors demand to hold French bonds instead of similar-maturity German debt to the widest in more than four years.

Polls show Le Pen is on course to win the first round of voting in April, but is unlikely to be victorious in the second on May 7. The French electoral system means the winner needs broad-based support, making it difficult for more extreme candidates to take power.

“The market is currently trading off on the expectation that Marine Le Pen is going to become the next president,” Beck said. “Our wager would be that that is extremely unlikely.”

To contact the reporter on this story: Netty Ismail in Singapore at nismail3@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds