‘Death Cross,’ growth abroad threaten US dollar

President Donald Trump has complained about the dollar’s strength, in part because it makes US products less competitive abroad. An index that measures the dollar against the currencies of the largest US trading partners stands near an all-time high.

Momtchil Pojarliev, Head of Currencies at BNP Asset Management, believes that trend will soon reverse. He is betting the dollar will fall against the euro, Japanese yen and Australian dollar as growth in those countries accelerates and their central banks raise interest rates while the Federal Reserve keeps them steady. That should narrow the gap in yields that has buoyed the US currency. 

In this regard we have prepared for you an article written by ‘Gertrude Chavez-Dreyfuss’ under the heading: “‘Death Cross,’ growth abroad threaten US dollar.” This article has appeared on the frontpage of the ‘Reuters’ news agency’s website.

Storm clouds are gathering over the US dollar, threatening a two-year rally in the currency that has squeezed corporate profits and angered US President Donald Trump.

According to the most recent data from the Commodity Futures Trading Commission measuring the net dollar amount of bets on a rising greenback, dollar bullishness in future markets stands at its lowest level in more than a year-and-a-half.
Analysts at Bank of America Merrill Lynch said the dollar triggered a so-called “Death Cross” on the last day of 2019. The bank said in a recent report the bearish technical formation occurs when the 50-day moving average crosses below the 200-day moving average, something that has been followed by a period of dollar weakness in seven out of eight instances since 1980.
Mark McCormick, Global Head of Foreign Exchange Strategy at TD Securities said easing worries over global trade and Brexit are stoking investor appetite for risk, pushing them out of safe haven assets like the dollar.
He said “The global economy looks like it’s healing,” adding, “The reduction of uncertainty will likely allow investors to take risks ... they didn’t want to take before.”

Because of the dollar’s central role in the global financial system, gauging its path is important for corporations and investors. Over the last several years, the currency has withstood a number of factors that analysts believed would pull it lower, including a dovish turn by the Federal Reserve and fears of a US growth slowdown.

The ICE Dollar Index edged 0.2 percent higher last year and was up around 10 percent from its 2018 low.

UBS, Schroders and Société Générale are among banks calling for the dollar to fall this year. DoubleLine Capital’s Jeffrey Gundlach has also told investors he believes the dollar’s next big move will be lower. 

The buck’s long stay near the top of its trading range has weighed on the balance sheets of multinationals like Procter & Gamble Co. and Whirlpool Corp (WHR.N), making it less profitable for them to convert foreign earnings into dollars.

Trump has complained about the dollar’s strength, in part because it makes US products less competitive abroad. An index that measures the dollar against the currencies of the largest US trading partners stands near an all-time high.

Momtchil Pojarliev, Head of Currencies at BNP Asset Management, believes that trend will soon reverse. He is betting the dollar will fall against the euro, Japanese yen and Australian dollar as growth in those countries accelerates and their central banks raise interest rates while the Federal Reserve keeps them steady. That should narrow the gap in yields that has buoyed the US currency. 

A few central banks already appear to be shifting to a less dovish stance. The Reserve Bank of New Zealand surprised investors when it left rates unchanged at its November meeting, while Sweden’s Central Bank last month became the first to raise rates back to zero from negative territory.

The European Central Bank, for its part, has signaled that it is done cutting rates for now.

Richard Benson, Co-Chief Investment Officer at Millennium Global Investments in London, likes a range of emerging market currencies, including the Mexican peso and Indian rupee. He expects the currencies of developing countries to rise against the dollar as global growth picks up. 

Others though believe that any dollar weakness will be short-lived.
Lee Ferridge, North American Head of Multi-Asset Strategy at State Street Global Markets in Boston, doubts that yield spreads between the United States and other developed countries will narrow enough to dent the dollar’s appeal.
He said: “In fact, a sharp slowdown in US growth would likely send nervous investors back into the dollar.”

The trend toward the de-dollarization of economies in the world is becoming more than ever apparent these days.

We see how countries like Iran, Russia and China are seriously diversifying their foreign exchange reserves, increasing investments in other currencies, and switching to settlements in national currencies among themselves. The main task is to reduce their dependence on the world's main reserve currency – the US dollar.

Why are more and more countries striving to switch to settlements in national currencies? Perhaps the most active participant in the process of de-dollarization is Russia. According to the Kremlin's calculations, the de-dollarization process has achieved significant success within the framework of the Eurasian Economic Union – 72 percent of settlements are carried out in national currencies.

However, it is important to note that the process of de-dollarization has gained even greater momentum with the onset of the trade war between the United States and China. Today, some countries are taking real practical steps to reduce dependence on the dollar.

In this regard, it is appropriate to recall the interesting proposal by the former Prime Minister of Russia Dmitry Medvedev, voiced in November 2019 at a meeting of the SCO Council of Heads of Government in Tashkent. He invited Russia's allies to develop mechanisms for switching to settlements in national currencies among the countries of the Shanghai Cooperation Organization and invited SCO financiers and banking experts to participate in a round table on this topic in Moscow.

The process of de-dollarization in settlements between Russia and China is also gaining momentum. On June 28, 2019, the countries agreed to switch to trade in national currencies. First, the ruble and yuan will be used by large companies with state participation, such as producers of energy resources and agricultural products.

Another country - Iran, together with Russia, is switching to settlement in national currencies. The central banks of Russia and Iran have concluded an agreement on settlements in national currencies under arms contracts. Now both parties are working on the issue of switching to settlement in national currencies when making international transactions.

Previously, India was also very restrained in such a matter, but now it is showing interest. The reason for this was the fact that in recent years, relations between India and the United States have not developed in the best way.

First, Trump terminated preferential trade status for India, which led to problems in foreign trade between the two countries, and then the US government rebuked India for the purchase of Russian S-400 air defense systems. Today, Russia, China and India are united against the dollar and have come up with a way to organize settlements in case of disconnection from SWIFT. As its analog, it is proposed to link the Chinese and Indian payment systems with the Russian financial message transfer system.

Besides, the Trump administration is constantly threatening to impose sanctions on its strategic ally, the European Union. Therefore, it is not surprising that some European countries are looking for ways to circumvent US sanctions so that their business with Russia, China and Iran does not suffer.

For example, the EU plans to expand cooperation with Russia in rubles and euros. In the summer of last year, the Russian Minister of Finance Anton Siluanov held talks with the Vice President of the European Commission for the Energy Union Maros Sefchovich. They agreed to create a working group to promote the issue of transferring mutual settlements into rubles and euros.

It seems that in England, a strategic ally of the United States, people gradually come to understand the need to abandon the dollar. Back in August of last year, the head of the Bank of England Mark Carney said that in order to stabilize the global financial system, it is necessary to abandon the dollar as a reserve currency and replace it with electronic means of payment, as trade wars adversely affect the global economy.

Indeed, trade and tariff wars have a negative effect on business around the world and the negative consequences of this are felt not only by direct, but also by indirect participants. The US is gradually losing its advantage and position in world markets. Trade, tariff wars, the application of sanctions by the US hinder the development of the countries themselves, and the world economy as a whole. In a multipolar world, a multipolar currency is needed. The only way out of this situation is negotiations and unity in purpose.