Dollar’s busted bull run ‘end of an era’

IT just may have been the week that broke the dollar. The greenback’s worst slump since November has a bevy of strategists and investors saying a turning point is finally at hand for the world’s primary reserve currency. If they’re right, there will be far-reaching consequences for global economies and financial markets.

The US currency is teetering at the lowest level in more than a year after signs of cooling inflation bolstered bets that the Federal Reserve will soon stop hiking interest rates. Dollar bears are looking even further ahead, to what they say are inevitable rate cuts, something the market consensus sees happening at some point in 2024.

“Our call for the dollar to enter a multi-year downtrend is partly based on the fact that the Fed’s tightening cycle will morph into an easing cycle, and this will pull the dollar down even as other central banks cut as well,” Steven Barrow, head of G-10 strategy at Standard Bank, said in a note on Friday. The Bloomberg dollar gauge was little changed in early Asian trading Monday. It tanked 2 percent last week, the biggest weekly drop since the five days through Nov. 11.

It’s hard to overstate the potential ripple effects from a long-term greenback slide. It would reduce import prices for developing nations, helping ease their inflation pressures. A greenback reversal also stands to bolster currencies like the yen, which has been tumbling for months, and upend popular trading strategies tied to a weaker yen. More broadly, a softer US currency would tend to boost American firms’ exports at the expense of their counterparts in Europe, Asia and elsewhere. The Bloomberg dollar index’s 2 percent decline last week also contributed to gains in greenback-priced commodities such as oil and gold.

Many investors have been waiting for a downtrend in the dollar for months and the selloff has fund managers from M&G Investments to UBS Asset Management bracing for an outperformance in the likes of the yen and emerging-market currencies.

“The most likely path forward is the dollar remains weak throughout the coming months,” said Peter Vassallo, a fund manager at BNP Paribas Asset Management. He’s betting on gains for the Australian dollar, New Zealand dollar and Norwegian krone.

Of course, there’s a long history of investors getting burned by premature bets on Fed rate cuts that would sink the dollar. That was the case early this year, when the currency seemed to be on the verge of a protracted downtrend only to stabilize as US economic data drove home that the Fed wasn’t about to stop hiking.

For the bears, the threat is that dynamic repeats itself, especially with the Fed likely to tighten further as soon as this month.

At Invesco Asset Management, Georgina Taylor isn’t prepared to reduce her dollar exposure just yet. Still firmly in data-watching mode, she’s not ready to conclude the battle to tame inflation is over. Bloomberg News