US DOLLAR FORECAST: BULLISH
- US Dollar[1] yield advantage may begin to drive gains if risk appetite holds up
- Iran conflict, trade wars, Brexit and US election may revive haven demand
- Service-sector ISM survey, December jobs report in focus on the data front
The US Dollar faced heavy selling pressure in the final three months of 2019, sliding to an eight-month low against an average of its major counterparts. Broad-based risk appetite improved in tandem, with the bellwether S&P 500 stock index rising to a record high. That points to the exodus of haven-seeking capital as the driver behind the currency’s weakness as US-China trade war and no-deal Brexit worries eased.
US DOLLAR HAS A YIELD ADVANTAGE VS. MAJOR CURRENCIES
As 2020 gets underway, the case for downward follow-through seems dubious. The Fed has embraced the idea that macro risks have diminished and worried aloud that low borrowing costs could fuel excessive risk-taking. That has served as the logic for stopping rate cuts. With seemingly no plans for tightening elsewhere in the G10, this locks in a USD[2] yield advantage of 100-150bps against the major currencies.
If the global backdrop has indeed proved, that rates gap ought to attract returns-maximizing investors to the US unit at the expense of alternatives. If it has not, safety-minded demand for the Greenback’s unrivaled liquidity may well return to drive gains. This has already shown up in the markets’ response to escalating conflict between the US and Iran[3].
TRADE WARS, BREXIT, US ELECTION MAY REVIVE HAVEN USD DEMAND
Anti-risk demand may be buoyed by uncertainty about the next steps in US-China trade talks – where the truly substantive issues remain unresolved – as well as the possibility that a no-deal Brexit may yet occur absent a UK/EU
