Saxo Bank’s head of FX strategy, John Hardy, has added his name to a list of prominent analysts predicting a difficult fourth quarter for the US dollar.
On September 27th, ABN Amro expressed its “strong conviction” on future dollar weakness and Nomura reaffirmed its “structural bearish view,” and now, one week later, we have Hardy, who says that the dollar is set to “top out” over the coming months and “continue its longer-term decline.”
The timing of these bearish dollar forecasts is surprising given that the US currency has appeared to turn a corner in recent weeks.
After getting pummelled for much of 2017 and recording a 12% loss between January and early September, the US Dollar Index – a measure of broad dollar performance – has spent the last three-and-a-half weeks rallying. The index’s 3% climb since September 8th is, of course, a result of the Trump administration’s recent progress on US tax reforms, but judging by expert opinions from ABN, Saxo and others, these reforms are either unlikely to make it through Congress or won’t have the reflationary effect that investors had once hoped for.
Instead, the dollar’s long-term fate will be tied to America’s burgeoning twin budget and currency account deficits, thinks Saxo’s Hardy.
“[The deficits] will grow under a regime of Fed quantitative tightening and the dollar will drop as there will be fewer buyers on the market for US Treasuries,” Hardy explains.
While ABN predicted that the dollar would weaken most against growth or commodity-sensitive currencies like the Norwegian krone, Swedish krona, Australian dollar and New Zealand dollar, Hardy believes it might suffer most against the Japanese yen, which “could do surprisingly well” upon a “massively expanded [Japanese] budget for defense expenditures…and social programs.” Hardy thinks that increased fiscal spending in Japan is likely to boost inflation and therefore allow the Bank of Japan to begin removing policy stimulus, which would necessitate a higher yen.
At 03:30 GMT on Wednesday, USD/JPY was trading at ¥112.63; down 0.2% on the day. The dollar had also fallen marginally against the euro, with EUR/USD now at $1.1770.
RBA Maintains Cash Rate at Record Low
As had been suggested in BestExchangeRates’ preview, the Reserve Bank of Australia presented an unchanged message and interest rate at its meeting on Tuesday.
In his statement, RBA Governor Philip Lowe retained his message of optimism about the Australian economic outlook but again expressed concerns over elevated levels of household debt and stagnant wage growth.
The bank’s cash rate was held at its record low of 1.5%. The rate has now been unchanged for fourteen months.
In the twenty-four hours following the RBA meeting, the Australian dollar gained 0.6% against the US dollar, climbing to $0.7860. The same gain was made in the AUD/NZD cross rate, which now stands at N$1.0949.