Dollar Could Falter on Trade Tensions, Buoying Emerging Markets

(Bloomberg) -- The greenback may be poised to return to the doldrums seen early this year, according to Wells Fargo Investment Institute.

Despite a boost since mid-April from an outperforming U.S. economy and Federal Reserve rate hikes, the dollar may start to falter in 2019 amid political risk and trade tensions, Peter Wilson, a global fixed-income strategist at Wells Fargo Investment Institute, wrote in a note to clients on Monday.

“Dollar strength, based on macroeconomic and monetary-policy divergence, has almost run its course,” he wrote. “As trade and tariff confrontations persist, the potential grows for trade wars to spill over into currency wars.”

The Bloomberg dollar index has gained about 1.6 percent this year, defying predictions that the greenback would extend last year’s slide. The U.S. currency’s strength led Wells Fargo earlier this month to lower its year-end forecast for the euro to $1.12 to $1.20, from $1.18 to $1.26 previously, and at the one-year horizon to $1.16 to $1.24, from $1.20 to $1.28. The euro traded at about $1.1750 Monday.

Looking ahead, risks around the dollar may build in the wake of U.S. midterm elections and as friction over trade and tariffs persists, the strategist said.

“The risk may rise of a more protectionist U.S. trade policy eventually leading to attempts by the president or Treasury Department to cap the dollar’s increase,” he wrote.

A softer greenback “would go a long way toward easing pressure on emerging-market (EM) assets,” according to Wilson.

©2018 Bloomberg L.P.