Economists at HSBC look at the cyclical, structural and political arguments for a material decline in the USD but do not find any evidence to be convincing enough to suggest an imminent USD bear market.
Key quotes
“Cyclical: The USD is no longer a high yielder in G10 and the Fed is significantly increasing USD liquidity. Investors will rebalance away from being overweight USD assets due to slowing US growth. Our counter-argument: The USD is in the middle of the pack in G10 yields and is not set to become a funding currency. Other central banks are expanding their balance sheets even faster than the Fed. Our economists forecast very little growth differentiation in G10 economies.”
“Structural: The US twin deficits (which consist of both current account deficit and fiscal deficit) are widening rapidly to record levels. Our counter-argument: Twin deficits are nothing new in the US and the USD has rallied in the face of these pressures before. The question is whether investors are willing to fund the deficit. We believe they are, assuming US growth does not substantially underperform and the USD does not lose its ‘safe haven’/reserve currency status.”
“Political: The USD’s reserve status is diminishing and political issues in the US point to the ongoing erosion of the USD as a ‘safe haven’ currency. Our counter-argument: While the portion of reserves held in the USD has declined, this long-term trend does not drive USD performance. Right now, there is no alternative to the USD in terms of liquidity or usability. Other currencies – such as the EUR and the RMB – may gain more share over time, but this is not a strong argument for an imminent USD bear market.”
“To be clear, we are not looking for a stronger USD. We expect greater differentiation against the USD in G10 FX, based on fiscal firepower and relative balance sheet expansions, with the AUD, and the NZD outperforming the EUR, the GBP and the CAD. In this world, and for the foreseeable future, the USD remains resilient but without a clear directional trend.”
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