US dollar rally losing steam: 3 key questions

US dollar rally losing steam: 3 key questions

The greenback is largely expected to continue its run-up in 2017, but the performance of the dollar index has thus far been otherwise. What’s reining in the dollar bulls and will it last? We ask the experts.

SINGAPORE: So far, 2017 has seen a reversal in the fortunes of the US dollar.

Largely expected to continue its uptrend this year, the greenback is now looking set to finish the first month of the year on a limp note, with the dollar index having lost nearly 2 per cent so far this year. On Thursday (Jan 26), it touched a seven-week low of 99.793 even as US stocks surged to all-time highs and the 10-year Treasury yield rose to its highest since the start of the month.

Hopes for US president Donald Trump's fiscal stimulus plans to turbocharge the US economy, alongside the US Federal Reserve’s interest rate hike last December and indications of faster-than-expected rate increases to come, propped up the dollar and fanned expectations for the rally to remain intact this year.

Given the recent weakness, what’s reining in the dollar bulls and will it last? We ask the experts.

Q: Why is the dollar rally taking a pause?

A confluence of factors, but mainly related to the newly-installed US commander-in-chief.

One key factor, according to analysts, is a comment from Donald Trump on how the greenback was “too strong”. Speaking to the Wall Street Journal in mid-January, he claimed that the stronger dollar was hurting the competitiveness of American firms and it was "killing" the US economy.

A lack of details on upcoming fiscal stimulus plans and the president’s leanings toward protectionist trade policy have also contributed to the pressure on the dollar, analysts said.

Meanwhile, ABN Amro Bank's senior forex strategist Roy Teo pointed out that the dollar may be undergoing a “healthy” correction given that the rally since the elections on Nov 8 have gone “too far, too fast”.

Q: Will the weakness last?

Unlikely, according to the analysts that Channel NewsAsia spoke to.

“If you look around the world, which economy has close to full employment and has inflation creeping up close to the central bank’s target? Which central bank in the world is now on a tightening bias? And which economy is fully committed to increasing fiscal stimulus?” Mr Teo said. “So if you take a step back and look at the broader picture, it’s tough to argue that the dollar is on a weakening path.”

The Singapore-based strategist also expects details of the fiscal stimulus plans to be unveiled over the next 100 days. “That will be dollar positive,” he said, adding that Mr Trump’s recent comments are just “verbal intervention” which will not “materially impact the dollar on a medium to long-term perspective”.

Mr Heng Koon How, senior foreign exchange investment strategist at Credit Suisse Asia Pacific, agreed.

“Our view is that it will still be a strong dollar year but it will be a very volatile one,” he told Channel NewsAsia. “It won’t be moving up in a straight line and there will be moments when you seriously question what is going on but objectively, all the drivers still point to dollar strength.”

For one, if Mr Trump manages to push through with his fiscal plans, they will come at a time when the US is at full employment which will lead to wage growth and, in turn, inflation, Mr Heng explained. With inflation indicators already picking up, he expects the US central bank to hike interest rates at least twice this year, supporting the dollar upwards.

“I would say this short-term lull will probably last until end-February because by then, we should see more signs of inflation coming through in the US,” Mr Heng added.

A note from Maybank dated Jan 26 also stated that the dollar index, which tracks the greenback against a basket of major currencies, will likely “continue its upward momentum albeit at a milder pace, possibly from mid-February into March as markets reprice Fed’s rate hike trajectory”.

Q: What does this mean for Asian currencies?

A strengthening US dollar usually spells bad news for emerging markets, but some analysts say with improved fundamentals and economies being better prepared, Asia is now less vulnerable compared to the “taper tantrum” in 2013.

Still, with Asian economies being export-dependent, and have less robust inflation and growth, currencies in this region are likely to weaken in face of a stronger dollar, Mr Teo said.

The more susceptible currencies include the South Korean won, Taiwanese dollar, Indonesian rupiah, Thai baht and the Philippine peso, according to Credit Suisse’s Mr Heng.

He added that he has a “neutral” stance on the Malaysian ringgit for 2017. “That’s not because we see things improving. From a valuation point of view, it has fallen too much and is now cheap on a trade-weighted basis. It’s a neutral view but the currency is still in a stalemate,” he explained, noting that he expects the ringgit to hover at the levels of 4.50 against the greenback and 3.10 against the Singapore dollar.

For the Sing dollar, analysts are expecting a “slow drift lower” to around 1.50. Apart from the stronger greenback, movements in the Chinese renminbi will also sway the local currency, given Singapore’s high-trade exposure to China.

“The Sing will follow the renminbi and so when weakness in the renminbi comes back, the Sing dollar will weaken. But we don’t see excessive weakness to 1.60… we think it’ll be a slow drift lower,” Credit Suisse's Mr Heng said.

Source: CNA/sk