PIMCO’s Joachim Fels: 5 factors supporting the US Dollar

According to PIMCO’s own Joachim Fels, there are five key factors built into current markets that are supporting the US Dollar, and could give the Greenback a further boost in the medium-term despite calls from major investment banks for a short dollar scenario for 2018.

Key quotes

“A new dollar downtrend is possible, as last year’s dollar depreciation and the recent knee-jerk reaction demonstrate, because currency markets seem to take verbal intervention from the U.S. administration seriously. An initial market move caused by, say, a series of presidential tweets could become a self-sustaining trend given that exchange rates are often influenced by fashions and momentum models.  However, we think further dollar appreciation in the coming months is more likely for many reasons.

1. Unlike early 2017, when comments by President Trump and U.S. Treasury Secretary Steven Mnuchin sent the dollar on a path lower, the greenback doesn’t look excessively strong right now. Despite a 6% appreciation since its February 2018 trough, the dollar index (DXY) remains 8% below its December 2016 peak.

2. Growth rates differ: Last year’s dollar depreciation was helped by the rest of the world playing growth catch-up with the U.S. This year, the U.S. is likely to keep growing strongly due to fiscal stimulus.

3. The Fed is likely to remain undeterred by the president’s verbal attack and keep marching up its own “appropriate policy path” dot plot. The Fed’s independence can only be repealed by an act of Congress, where there would likely be no majority for such a dramatic experiment, and Fed Chair Jerome Powell and the Federal Open Market Committee will be keen to avoid any semblance of yielding to complaints from the White House.  

4. China looks likely to continue easing liquidity in an attempt to smooth the deleveraging process and support its economy and asset markets. This suggests further downward pressure on the yuan versus the dollar.  

5. Last but not least, trade tensions between the U.S. and other countries are likely to continue in the run-up to the November U.S. midterm elections, as polls suggest that President Trump’s tough rhetoric is very popular with the Republican base. The threat of tariffs on an additional $200 billion of imports from China and the threat of a 25% tariff on all imported autos and parts are real and will likely lead to more volatility in financial markets in the coming weeks and months. Rising risk aversion typically supports U.S. assets relative to foreign assets, including the dollar against most currencies.”