Further Dollar Weakness Could Give Asian Stocks a Boost
The Bloomberg JPMorgan Asia Dollar Index is close to its highest since June 2018.
(Bloomberg) -- The prospect of renewed weakness in the U.S. dollar following Democrat Joe Biden’s presidential victory and Monday’s positive vaccine news should give investors another reason to favor Asian stocks.
The Bloomberg JPMorgan Asia Dollar Index -- a gauge of the region’s currencies against the greenback -- is close to its highest since June 2018, even after an overnight slide in the yen as investors pulled out of havens. The MSCI Asia Pacific Index closed at an almost two-year high Monday, and extended gains Tuesday as it joined in a global equity rally.
A weaker dollar signals higher risk appetite and is seen as a positive for growth in Asia’s emerging economies, many of which rely on imports priced in the greenback. Stronger local currencies also help bolster national balance sheets and borrowers from sovereigns to corporates benefit from lower repayments on dollar-denominated debt.
“Faced with a softening dollar, U.S. investors typically seek growth and earnings opportunities abroad in general, and in Asia in particular,” said John Woods, chief investment officer for Asia Pacific with Credit Suisse Group AG. “The economic recovery is gaining traction, and corporate earnings are responding positively. Asia is setting itself up for an improved and constructive start to 2021.”
The dollar’s woes are expected to continue, according to market watchers. The positive news on the vaccine front is likely to encourage a push toward riskier assets and away from traditional havens.
Meanwhile, the fact that the Democrats have likely failed to gain control of the Senate will diminish the size of any future stimulus package and heap pressure on the Federal Reserve to act more aggressively to prop up the economy, according to Mark Haefele, chief investment officer at UBS Global Wealth Management.
“The currency will continue to depreciate over the longer term, due to less favorable U.S. interest rates relative to other G-10 currencies than in the past,” he wrote in a note.
The end of President Donald Trump’s often unpredictable foreign policy, especially with regards to the damaging trade war with China, is also seen as another positive for Asian assets.
“The weaker dollar is the real story and not the individual outperformance of any one country or bloc,” said Jeffrey Halley, senior market analyst with Oanda Asia Pacific Pte. “Asian currencies and their antipodean neighbors will continue to appreciate, as the pro-cyclical growth trade is released from captivity.”
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