At Goldman Sachs, strategists say the yen may slump to the lowest against the dollar since 1990. Talk of parity is stalking the euro. And across Wall Street, speculators are again piling into bets on the US currency after being burned by its unexpected rise.
(Bloomberg) — At Goldman Sachs, strategists say the yen may slump to the lowest against the dollar since 1990. Talk of parity is stalking the euro. And across Wall Street, speculators are again piling into bets on the US currency after being burned by its unexpected rise.
For all the uncertainty rattling stock and bond markets, there’s something of a consensus forming around the dollar: As long as the Federal Reserve is on track to keep interest rates elevated, it’s likely to drift even higher — at least through the rest of the year.
The view reflects the growing cracks that are emerging in the global economy as the US shows surprising resilience and growth falters in Europe and China. With the Fed squarely focused on taming inflation, that’s promising to leave US interest rates well above those in much of the world, fueling demand for the dollar as investors pile in to chase bigger returns than they can get back home.
The pull has strengthened as the realization sinks in that the Fed will likely keep monetary policy tight through next year. That has pushed Treasury yields to the highest since before the 2008 financial crisis and driven the dollar higher against every other major currency since mid-July.
“Higher for longer, the resilience of the economy, pushing back on rate cuts,” said Jane Foley, head of foreign-exchange strategy at Rabobank. “The dollar is one that everyone really understands.”
Many investors began the year expecting the dollar to fall once inflation ebbed, growth slowed and the Fed mounted an about-face from its most aggressive interest-rate hikes since the early 1980s. Instead, the economy has defied pessimistic forecasts and Fed officials have delivered a steady drumbeat of hawkish comments, pushing an index of the dollar’s strength back to the highest since November.
Trading in the futures and options markets shows investors expect the trend to continue. Through last Tuesday, speculative traders raised their long bets on the US currency to the highest since June, according to data from the Commodity Futures Trading Commission, while asset managers rolled back short bets to the lowest since October. Options show little fear the dollar will soon alter course, with an index of one-month risk reversals on the Bloomberg dollar index rising to its most bullish level on the dollar since the end of March.
At the same time, some bank analysts have also been ratcheting up forecasts for where the dollar is heading.
At Rabobank, Foley now sees the euro dropping to $1.02 by the end of the year, while Nomura’s Jordan Rochester recently said parity with the dollar isn’t out of the question (it’s around $1.05 now). And at Goldman Sachs, strategists expect the yen within six months to fall to 155 per dollar, a level not seen since the aftermath of the nation’s 1980s property bubble.
Of course, the dollar’s rally could reverse if the US economy stumbles under the weight of higher interest rates, and the inrush toward the dollar could mean it has run up too far. Saxobank market strategist Charu Chanana said in a note this week that risks are piling up around the US economy, through she said the dollar’s rally has more room to run.
Since mid-summer, Lord Abbett & Co. portfolio manager Leah Traub has been predicting that the market’s bets on rate cuts would be pushed back further and further, in turn boosting the greenback.
“It’s not like we’re in 2007,” said Traub. “It’s not going to be easy for the Fed to cut given where inflation is. It’s one thing for inflation to go from 4% to 3%, but it’s another to go to 2%.”
At Bank of America Corp., strategists also see monetary policy supporting the dollar through mid-2024. They highlighted in a recent note how the greenback had already traded through the bank’s year-end euro forecast of $1.05.
Even longtime dollar bull Win Thin, who heads global currency strategy at Brown Brothers Harriman & Co., said he was surprised by the dollar’s swift rebound from the drop late last week, when traders were concerned a stalemate in Congress would shut the federal government. “The dollar correction was much shallower than I would have expected but it’s clear that the shutdown risks were weighing on the dollar and now that has passed,” Thin said.
“It’s firing on all cylinders,” he said. “Strong data, higher yields, and hawkish Fed talk are all very positive for the greenback.”
–With assistance from Robert Fullem and Vassilis Karamanis.
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