Dollar fundamentals remain bearish, analysts say.
The euro is up 4 percent against the dollar, the Brazilian real is up 6 percent and the Chinese yuan about 3 percent.
The U.S. dollar currency index is down 4% from its 2021 high, making the greenback the worst performing of the world’s major currencies so far this quarter.
Net bets against the dollar in the futures markets have risen for five consecutive weeks and stand at $ 15.86 billion, the highest level since early March.
“Part of what we’re seeing is the start of the first rounds of rebalancing global portfolio flows against the dollar,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
Several factors are weighing on the dollar. Some investors see the Federal Reserve’s insistence that it will not cut its bond buying operations anytime soon, even if inflation heats up, as a double whammy that undermines the dollar’s appeal. . Some quantitative easing policies amount to printing dollars, while inflation erodes the purchasing power of money.
“The 800-pound gorilla in the room is that there is going to be growing concern that the Fed is behind the curve in the fight against inflation,” said Chuck Lieberman, chief investment officer of Advisor Capital Management.
As the Fed reiterated its dovish stance, some countries – including Brazil, Russia and Turkey – hiked rates, making their currencies more attractive to yield-seeking investors.
In the United States, the 10-year Treasury yield fell about 17 basis points from its 2021 high.
Expectations that US growth could peak as the rebound in Europe and other regions is just beginning is also hurting the dollar, investors said.
After contracting in the first quarter, the eurozone’s gross domestic product is expected to accelerate later in the year and increase 9.2% on an annualized basis in the third quarter, according to a forecast from Oxford Economics. The company expects US GDP to peak at a growth rate of 13.3% in the second quarter.
Shalett of Morgan Stanley believes the euro, pound sterling and Chinese renminbi will benefit the most from the weakening dollar.
Due to the global dominance of the dollar, its fluctuations often affect a wide range of assets.
Commodities are valued in dollars and become more affordable for foreign investors when the greenback falls. The S & P / Goldman Sachs Commodity Index is down about 3 percent from its recent highs in prices for copper, oil and other commodities which have jumped this year.
A weaker dollar also tends to be a welcome development for US multinationals, making them more supportive of converting their foreign earnings into their national currency.
Companies in the tech sector are among the most exposed to currency fluctuations, with nearly 54% of the category’s total revenue coming from abroad, according to an analysis of Russell 1000 companies by Bespoke Investment Group. Next comes the materials sector, where almost 48% of total income comes from abroad.
Signs that inflationary pressures could force the Fed to ease its stance on interest rates could help reverse the dollar’s decline.
A “number” of Fed officials appeared poised to consider monetary policy changes based on a strong and continuing economic recovery, according to the minutes of the US central bank’s April meeting. That month’s anemic labor number, however, may have clouded their view. (nL2N2N628K)
“We are concerned about an overheating scenario in the United States, which could lead to inflation well above what the Fed would tolerate,” analysts at BoFA Global Research wrote. “This could indeed surprise the markets in our opinion, and lead to a significant movement of the (dollar) upwards.”
A pullback in equities could also boost the dollar, a popular destination during times of market turmoil.
Paresh Upadhyaya, chief currency officer and portfolio manager at Amundi Pioneer Asset Management, believes such risks could prevent some investors from betting on further weakness in the dollar.
Nonetheless, he believes that accelerating global growth will continue to push the Australian, New Zealand and Canadian dollars up at the expense of the greenback.