- Greenback strength has peaked at current levels, Redeker says
- Widening credit spreads, falling equities will bruise currency
The dollar’s bull run has ended and it’s time to sell the currency, according to Morgan Stanley.
“We believe the USD has reached its peak at around current levels,” Morgan Stanley’s global head of FX strategy Hans Redeker wrote in a note. “The USD may weaken as credit spreads widen, equity prices fall, and sovereign bond yields also begin falling amid disinflationary pressure and falling oil prices.”
Escalating trade tensions, climbing Treasury yields and a robust U.S. economy have fuelled investor demand for the world’s biggest reserve currency. The Dollar Spot Index has gained 8 percent since mid-April, cheered on by bullish hedge funds who recently raised their net long positions on the currency to the highest since January 2017.
However, Morgan Stanley reckons recent foreign flows into U.S. assets have been short-term and are prone to a quick reversal — another sign dollar weakness may come.
“Instead of strong inward foreign direct investment or other long-term flows, we see evidence that flows to the U.S. have been into money market funds and are carry trade motivated,” Redeker said.
Morgan Stanley has joined a growing pool of banks that think the greenback’s strength is waning. Goldman Sachs’ foreign-exchange strategy team said the greenback is approaching a peak, which should relieve pressure on currencies such as the yuan. Credit Agricole also sees a weaker dollar after the Democrats took control of the House of Representatives at the U.S. midterm.
Cheaper Oil
Adding fuel to the bearish fire will be a slowing American economy, falling oil prices, a stabilizing Chinese currency and tighter liquidity in U.S. markets, Redeker said.
This means emerging-market assets that have been battered by rising Treasury yields and dollar strength now look set to shine, according to Redeker. Lower oil prices and stable building material prices including those of iron ore and copper may augur an emerging market rally, he said.
“We expect slowing U.S. growth to benefit countries that are either reliant on USD-denominated funding or vulnerable to higher global funding costs,” Redeker said.
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