Expected low interest rates and continued depreciation of the US dollar

category:Finance
 Expected low interest rates and continued depreciation of the US dollar


Investors are becoming less attractive to hold dollar denominated assets after the Fed cut interest rates to zero this year. This is likely to continue for some time, given the Feds commitment to keep us interest rates near zero for the foreseeable future. The Feds bond buying measures, that is, buying corporate bonds and treasury bonds, also sent bond yields plummeting.

In the view of investors, when inflation expectations rise, the real yield on US Treasury bonds has fallen to negative value, thus losing its attractiveness as a hedge asset. As a result, investors seeking higher yields are now investing in bonds outside the United States that offer positive yields adjusted for inflation.

Jan Dehn, head of research at Ashmore group, an investment firm, said he recently sold dollars in his portfolio to buy local currency government bonds from Mexico, Indonesia and Brazil.

Mr. Dein expects the dollar to weaken in the next few years, as economic recovery outside the US is likely to be faster than in the US. Vasileios gkionakis, head of foreign exchange strategy at Lombard Odier, a Swiss private bank, agrees that the dollar is still overvalued by 10% to 15% and is betting that the dollar will fall further in 2021. He plans to use the U.S. dollar as a financing currency to bet on the strength of Asian emerging market currencies, including RMB and won.

Stuart Edwards, a UK based fund manager at INVESCO, also expects the dollar to weaken, especially given the Feds recent interest rate guidance. Its very difficult to bet against the Fed. He said he had bought Mexicos local currency government bonds in dollars. Goldman Sachs recently said the Mexican peso is up 13.1% from its march low and is expected to deliver a return of about 2.25% in 2021.

Edwards has bought Mexican Peso denominated government bonds in dollars. According to Goldman Sachs, the peso has risen 13.1 per cent from its march low and will provide a return of about 2.25 per cent next year.

However, not all investors believe the dollar will continue to weaken. Given the impending US presidential election and the continued high infection rate of the epidemic in the United States, some investors have turned to bet on a stronger dollar. If the U.S. dollar is stronger, it may cause some investors to close their positions and buy back the US dollar, thus further strengthening the US dollar. In fact, due to investors concerns about the upcoming US election, the weakening of the possibility of fiscal stimulus measures before the election, and the record high of new diagnoses in one day in Europe, the size of US dollar net short position in the recent week has indeed fallen to the lowest level since the end of July. Zach pandl, CO head of global foreign exchange, interest rate and emerging market strategy research at Goldman Sachs, believes that if the global economy falls back into recession, it will also be good for the dollar, because the dollar remains a safe haven. In addition, he said, the dollar tends to appreciate when U.S. stocks go back sharply. Source of this article: Yang Bin, editor in charge of the first finance and Economics_ NF4368

However, not all investors believe the dollar will continue to weaken. Given the impending US presidential election and the continued high infection rate of the epidemic in the United States, some investors have turned to bet on a stronger dollar. If the U.S. dollar is stronger, it may cause some investors to close their positions and buy back the US dollar, thus further strengthening the US dollar.

Zach pandl, CO head of global foreign exchange, interest rate and emerging market strategy research at Goldman Sachs, believes that if the global economy falls back into recession, it will also be good for the dollar, because the dollar remains a safe haven. In addition, he said, the dollar tends to appreciate when U.S. stocks go back sharply.