Dollar Is ‘Best of a Bad Bunch’ in Surprise Turn for Wall Street
(Bloomberg) -- As global central bankers put their tightening plans on hold, the dollar may emerge again as a winner. Not because it’s particularly attractive, but because it’s proving to be the best of a bad lot.
From the Reserve Bank of Australia to the European Central Bank, officials are acknowledging a rising tide of risks, and shifting their monetary-policy outlooks as a result. The upshot is that even with the Federal Reserve signaling it’s done hiking interest rates for the time being, traders increasingly see the U.S. currency holding its own as the world’s doves gain the upper hand. Since the Fed’s pivot last week, the greenback has gained for six straight days.
The U.S. is the “best of a pretty bad bunch,” James Athey, a senior investment manager at Aberdeen Standard Investments in London, said in a Bloomberg TV interview. While the American economy remains on an upward trajectory, for the euro zone “that story does not apply in the slightest, he said. The underlying health of the economy from a structural and now a cyclical perspective is far, far, far weaker.”
Australia’s central bank governor Philip Lowe shifted to a neutral policy stance this week, acknowledging greater economic challenges, causing the local dollar to tumble 1.8 percent Wednesday. Traders are increasing bets on a rate cut in New Zealand after the nation’s jobless rate rose more last quarter than economists forecast.
And European Central Bank President Mario Draghi last month admitted the euro zone’s risks had moved to the downside as trade tensions and politics threaten to derail growth. Most investors and economists now don’t anticipate the ECB will raise borrowing costs until December at the earliest, and perhaps much later.
That’s left the U.S. economy looking relatively robust by comparison as policy makers pivot from preventing any overheating to sustaining its expansion.
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Along with recent upside on dollar crosses, traders are already paying more for options contracts that benefit from the greenback gaining against its major peers over the next several months relative to those guarding against a drop. The spread between U.S. and German 10-year yields has widened about 10 basis points this year, even as yields on Treasuries fell to the lowest in almost a year in January.
“That’s the paradox, that the dollar is gaining even though U.S. yields remain low,” said Win Thin, global head of currency strategy at Brown Brothers Harriman in New York. If the market begins to price back in a Fed rate hike later this year and 10-year Treasury yields move higher, “that would be the next leg for a dollar rally,” he said.
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