Foreign Investors Expect the Dollar to Remain Weak Under Biden4 min read . Updated: 16 Jan 2021, 02:19 PM IST
- Increased stimulus spending could play a role in further softening of the U.S. currency
The view from financial experts abroad is that the dollar, currently near its weakest level in three years, will stay weak, holding on to much of its 2020 decline.
The ICE U.S. Dollar Index, which measures the greenback against a basket of currencies, fell more than 6% in 2020, marking its worst performance in three years. That left the dollar hovering near its lowest level since April 2018.
Expectations for the dollar have been clouded in recent weeks by political turmoil in Washington, D.C., and a worsening economic outlook. The crisis precipitated by the mob attack on the U.S. Capitol inspired some safe-haven buying of dollars in international markets. Elevated coronavirus-infection levels, despite the rollout of vaccines, meanwhile, threaten to subdue an already faltering economic recovery both in the U.S. and abroad, which also suggests downward pressure on the dollar.
At the same time, investors expect that a proposed $1.9 trillion Covid-19 relief plan from President-elect Joe Biden will either weaken the dollar or limit any near-term future appreciation as the infusion of cash to businesses and households increases supply. Such an infusion could lend to dollar appreciation over the medium to long term because it will boost U.S. economic growth relative to other countries, but it is likely to work against the dollar in the short term because of the supply issue.
“A currency market isn’t different from any other market," says William Dinning, chief investment officer of U.K. fund manager Waverton Asset Management. “If there’s a lot of potatoes available, it’s going to be cheaper. If there’s a lot of dollars available, it’s going to be weak."
Investors are overwhelmingly betting the dollar will fall further, according to positioning data compiled by RBC Capital Markets. Recent dollar weakness has encouraged investors to buy assets priced in emerging-markets currencies that stand to appreciate further from their 2020 lows.
To benefit from the dollar’s weakness, Mark Haefele, chief investment officer at UBS Global Wealth Management in Zurich, has been increasing clients’ exposure to high-yielding currencies such as the Russian ruble and Indian rupee.
But some investors are starting to wonder how much further the dollar can weaken. So far this year, the ICE U.S. Dollar Index has risen 0.9%.
Francesca Fornasari, head of currency solutions at London-based Insight Investment, says she believes the dollar could become more attractive than other currencies as high Covid-19 infections in much of the world weigh on the global recovery. Ms. Fornasari has pared some of her bets on the dollar’s weakness in recent weeks.
While she thinks that Asian currencies like the Chinese yuan will continue to gain in relation to the dollar, Ms. Fornasari says she has struggled to find other currencies that have the potential to appreciate against the dollar. “We’re running out of things we like on the other side, which is usually an indication that the dollar negative view is winding down," she says.
Currencies are affected by a variety of factors that influence capital flows, such as trade and investment flows, interest rates, and relative growth and inflation. When the U.S. economy is strengthening it generally attracts inflows into the bond and stock markets from abroad, creating demand for dollars. At the same time, as markets have experienced recently, when the global economy recovers, the dollar tends to weaken as investors search out riskier investments abroad.
If the dollar continues to weaken, that tends to carry benefits for investors abroad who buy U.S. stocks and bonds. It can make the assets less expensive than they were previously.
Seema Shah, London-based chief strategist at Principal Global Advisors, is among those investment pros who think the dollar will continue to weaken due in part to the expected additional fiscal stimulus. For overseas investors, she says, it “adds more credence to the argument that this should be a pretty good year for U.S. stocks."
One counterargument to continued dollar weakness says that the dollar could find support from overseas purchases of new debt that the U.S. government is expected to issue to fund additional stimulus. For global fixed-income investors, the current yield on 10-year Treasurys above 1% compares well with subzero rates on large deposits in much of Europe and Japan.
A much bigger boost for the dollar, of course, would be a strong rebound in the U.S. economy. Once Covid-19 is brought under control, and such signals as new hiring and rising consumer confidence are seen, it could prompt the Federal Reserve to accelerate its timeline for raising interest rates, which could make U.S. bonds even more attractive in coming years. A rate increase would also increase the rate investors are paid to hold dollar assets, making the greenback more attractive and supporting a higher climb.
For now, many investors have sold some U.S. stockholdings and deployed spare cash to buying stocks denominated in euros, British pounds and Chinese yuan. While U.S. stock indexes are heavily weighted to tech, cheaper overseas markets that have more financials and manufacturing stocks have drawn inflows.
Given the improving U.S. economic outlook, meanwhile, most money managers overseas have no plans to exit American markets. Many are also planning to hold on to U.S. technology stocks that have performed well throughout the pandemic and offer a source of safety to investors.
“From a foreign investors’ perspective, it pays to be in the U.S.," says Jonathan Petersen, markets economist at Capital Economics.