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King Dollar Is Abdicating and That’s OK


There are many reasons to expect a weaker U.S. dollar next year and perhaps for longer, but none more important than the new policy stance of the #Federal #Reserve.

The U.S. dollar briefly rallied in #March due to its haven role in investment portfolios. #Since then, it has dropped around 12% against a trade-weighted basket of currencies as the U.S. turned out to be even harder hit by the coronavirus pandemic than most major economies.

#As vaccines are rolled out and the global economy snaps back, this trade won’t necessarily run in reverse. #Rather, currencies of countries that export commodities and manufactured goods are likely to keep strengthening against the dollar, as would be seen in a typical global recovery. #Some #Asian exporters already are quietly intervening to limit their currencies’ rise.

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#But this time, reasons to expect a weaker dollar run even deeper. #For several years before the pandemic, U.S. interest rates on both the long and short ends of the yield curve were substantially higher than in #Europe and #Japan—a major source of strength for the U.S. currency. #That premium has largely disappeared, though, as the #Fed lowered short-term rates to near zero and launched a new round of asset purchases. The yield on 10-year U.S. #Treasury notes has fallen from almost 2% at the start of the year to around 0.93% now.

#Granted, that is still well higher than the 0.02% and minus-0.58% yields on 10-year #Japanese and #German government bonds, respectively. #But real yields in the U.S. are in fact lower on an inflation-adjusted basis, points out markets economist

#Simona #Gambarini

of #Capital #Economics. #In the U.S., the core consumer-price index was 1.6% higher than a year earlier in #November. #That compares with slight deflation in #Japan and the eurozone.

#This gap in real rates is unlikely to narrow soon. #After all, the #Fed pledged in #August to let inflation run above its 2% target for an extended period and not to respond to falling unemployment with pre-emptive rate increases. #Meanwhile, peer central banks around the world continue to target inflation rates of around 2% while falling well short of that.

#If markets take the #Fed at its word, they won’t bid up the dollar as they normally might in response to robust inflation or growth data out of the U.S. #This is why TS #Lombard economist

#Steven #Blitz

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calls the new framework an effective end to the traditional “strong dollar” policy of the U.S. government.

#Consider, for instance, the likely market reaction to a large stimulus package early in the #Biden administration. #Big doses of deficit spending are typically seen as dollar-negative because they mean the U.S. will have to import more foreign savings. #But stimulus could be seen as dollar-positive if it successfully boosts U.S. growth. #This time, however, the #Fed has essentially pledged not to lift rates pre-emptively in response to positive economic news, so a big stimulus package is likely to be unambiguously negative for the dollar.

#None of this needs to be bad news for investors. #As most assets are priced in dollars, a weaker dollar often means higher asset prices on everything from stocks to commodities to emerging-market bonds. #Investors whose net worth is concentrated in dollars should make sure they are diversified, for example by not hedging the currency exposure on their foreign equity holdings, says

#Brian #Rose,

#Senior #Economist, #Americas at UBS #Wealth #Management.

The perennially strong dollar may be a thing of the past. #Investors are unlikely to miss it.

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#Write to #Aaron #Back at [email protected]

#Copyright ©2020 #Dow #Jones & #Company, #Inc. #All #Rights #Reserved. 87990cbe856818d5eddac44c7b1cdeb8



[ source link ]
https://www.wsj.com/articles/king-dollar-is-abdicating-and-thats-ok-11609326180

##King ##Dollar ##Abdicating

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