Dubai: The tables have turned for the dollar, and analysts expect a status quo to last for sometime.
After gaining 10 per cent for the most part of 2015, the dollar index started 2016 on a negative note after making unsuccessful attempts at breaching the keenly watched 100 mark. It has been languishing due to conflicting signs from the data points, which are signalling flat rates and Federal Reserve officials are pointing to a rate rise in June meeting.
“The US dollar will likely weaken further if the Fed decides to postpone its rate hikes, which is still quite possible in view of not-so strong US economic indicators and 2016 being the year of presidential elections,” Amr Hussein Elalfy, managing director, global head of research at Mubasher Financial Services told Gulf News.
The stance from the Federal Reserve has been dovish after it hiked rates in December for the first time in nearly a decade. But there have been voices advocating a rate hike again in June. Atlanta Fed President Dennis Lockhart on Tuesday said a June rate increase was “a real option,” while San Francisco’s John Williams said he would support such a move provided the economy stayed on track. Wednesday’s jobs report casts doubt on that assessment.
But market experts think otherwise.
“We are back in the conventional policy cycle, and Fed would be cautious in raising rates. We expect the trend to continue, but the speed to slowdown,” said Patrick Odier, senior partner with Lombard Odier.
Even the international fund managers have been reducing bets on a stronger dollar. In the CFTC data published on April 26, funds boosted their bets on a dollar decline to the most since August 2014.
Tactical shifts
More fund managers now believe that there could be a rate hike in September or December meeting, leaving more room for dollar weakness. And even asset managers like UBS has made tactical shifts in its portfolio on bearish outlook on dollar.
UBS maintained overweight on US equities as they expect earnings to improve helped by dollar weakness and due to oil price recovery, and increasing allocation in corporate bonds in euro terms.
“We are therefore increasing our allocations to euro-denominated corporate bonds at the expense of US dollar-denominated ones in model portfolios to avoid overexposure to the US at a time when its cycle is getting long in the tooth. We also are raising allocations to corporate emerging market bonds in our balanced model portfolio,” Mark Haefele, Global Chief Investment Officer at UBS said.
This has all been done looking at the dovish stance by the Federal Reserve.
Indian rupee strength to continue
The Indian rupee, which neared record weakness in February, may continue its reversal, and strengthen further on hopes of a good monsoon and expectations of foreign flows.
The Indian currency rose to as high as 66.49 a dollar earlier in the week, the strongest level since March. The Indian currency hit close to a record low of 68.89 to a dollar in late February.
“With all the positive factors around, there is a high possibility of the Indian Rupee getting stronger towards 64-65 over the next few months,” said Pradeep Unni, head of trading, Richcomm Global Services.
The weaker dollar and the accompanying resurgence in risk-appetite have pushed up emerging market assets, including Asian currencies. The Indian rupee has relatively been a flat performer in comparison to its Asian peers due to swift currency interventions by the Reserve Bank of India in order to avoid the currency volatility. Foreign funds bought a net $4.7 billion (Dh17.2 billion) of Indian shares in the last two months, while their holdings of local-currency government and corporate bonds rose 48.3 billion rupees ($726 million).
