The dollar appears to be succumbing to downward pressure from lower US debt yields as investors remain jittery after last week's surprisingly dovish Federal Reserve policy statement.
The US dollar is likely to move sideways, is the word coming in from Dominic Bunning, associate director- Fx strategy of HSBC. As far as the dollar-euro is concerned, he doesn’t see significant high moves. There are, however, downside risks politically in the Europe.
He says it may be the beginning of the end of the dollar bull run. Historically, the average rally on the dollar index has been 20 percent, but since 2011, the dollar has rallied 40 percent. The eventual rate hikes are already priced into the dollar, is the HSBC view.
Below is the verbatim transcript of Dominic Bunning’s interview with Sumaira Abidi and Reema Tendulkar on CNBC-TV18.
Sumaira: Dollar is already at that 97 odd levels now, how big a correction could we be looking at?
A: I think instead of setting specific levels on it we have seen a pretty big move already from the low in euro-dollar for example coming up to near the 1.10 level. We don’t think there is necessarily an aggressive fall in the dollar, what we are saying is that we think that the dollar rally in the longer term is starting to come through and we are going to see a period now of a more sideways move in many respects versus the number of currencies for the US dollar because the strength of the dollar is starting to have a more negative impact on the US economy. That could feed into maybe slightly softer US rate expectations. Also, we are heavily positioned long dollars, we have seen a big move, we just think that there is a little bit more room for this stabilisation in the near-term to continue.
Reema: On an average perhaps what could be the dollar index or even the euro-dollar in the coming three months or six months or perhaps even by the end of this calendar year?
A: We are not looking euro-dollar to move aggressively high this year. We have still got euro-dollar at 1.05 by the end of 2015. However, I think it can be quite a choppy volatile range in getting there. A number of other houses for example have started looking for euro-dollar to break parity. We don’t believe in that story in our base case.
There are some downside risks politically in Europe for example or if the dollar rally starts to gain a lot more traction in other places such as versus the yen or versus emerging markets. However, we think that we are going to see some slight strength in those different areas and in terms of the euro-dollar rate will be largely sideways although there will be some volatility around that.
Sumaira: In your latest report you say that the danger of a destructive USD rally still remains. What is it that could trigger something like this?
A: I think one of the biggest factors I think about is in terms of emerging markets and what the stronger dollar can mean for some of those markets where there are high levels of external debt for example and where a stronger dollar makes it more difficult for local companies to pay down that debt which is denominated in dollars.
So, what we have seen at the moment in EMs particularly is a lot of domestic stories which are causing local currencies to weaken so Brazil for example, Russia, Indonesia, Malaysia in this part of the world would see coming under pressure. However, that has more been the domestic dynamics. If we start to see the dollar trend kick higher again then that could become a lot more dangerous for emerging markets currencies and emerging market economies as well.
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