Pimco says dollar’s fall is just starting with Asia FX standing to gain

The dollar’s decline has only just started, with room for the world’s reserve currency to weaken against emerging markets, according to Pacific Investment Management Co.

While the greenback has dropped against major peers, it’s still up about 2 per cent on a trade-weighted basis and stronger than its average in 2019, according to Stephen Chang, a Pimco portfolio manager in Hong Kong. An important milestone will be the passage of a new US stimulus package, he said.

“We are still in the early innings of dollar depreciation,” Chang said. “An important factor to watch is whether a phase four fiscal stimulus package will be passed in the US, as otherwise the discontinuity of fiscal support will lead to a significant risk-off and USD bullish event.”

The dollar has come under increasing pressure as the Trump administration struggles to reign in the pandemic and the Federal Reserve pledged unlimited liquidity to support a battered economy. The Bloomberg Dollar Spot Index has tumbled 10 per cent since its March high while hedge funds have turned bearish on the greenback for the first time in two years.

The US Congress is trying to break an impasse over a new deal, in addition to a record stimulus that’s already stoking inflation jitters among investors. The dollar could also face further weakness after Federal Reserve Chair Jerome Powell suggested Thursday that the policy makers are comfortable with higher levels of inflation, implying that US rates will stay lower for longer.

“Under the Fed’s new regime, even once the US economy begins to recover, markets will have far less reason to expect higher rates in the US,” said Ranko Berich, head of market analysis at Monex Europe Ltd. in London. “As such, we are likely to see a far less responsive US dollar to any possible economic upswing.”

Cyclical recovery

While most developed nation currencies have benefited from a weaker dollar, Asian peers have lagged, said Chang. China’s yuan and the Korean won could do well, he said, echoing views from Credit Suisse Group AG and UBS Wealth Management.

A cyclical recovery in Asia, particularly in Korea and China, which have handled competently the public health situation, should allow these currencies to outperform, said Chang before Powell’s speech.

Both Asian currencies are on track for their third month of gains against the dollar as improving risk appetite fuels demand for the assets. Asia’s emerging market currencies all rose on Friday after Powell’s speech, with offshore yuan advancing as much as 0.4 per cent to its strongest since January.

“Low real rates would weaken the dollar,” said Kim Yumi, a market strategist at Kiwoom Securities Co. in Seoul. “Asia will generally benefit from dollar weakness with gains in the yuan, Taiwan dollar and won standing out.”

Pimco also favours Malaysian and Chinese government bonds on expectations the nation’s central banks may continue cutting rates to revive their pandemic-hit economies.

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