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U.S. dollars：Too early to call an end to bear market, but no longer a one-way bet
Investors' tendencies have been somewhat predictable since the eruption of the global financial crisis: rush to risky assets when emboldened, retreat to the U.S. dollar when scared. The push-pull between the U.S. dollar and assets such as stocks and commodities has diminished of late amid signs of economic recovery, but it has not broken down entirely. Investors should watch the lookout for shifts in correlations which may signal the end of the U.S. as a pure safe-haven play and becomes a value proposition instead. However, a full shift may still be months away. For the correlation to break down entirely, investors will need to become more confident that the U.S. economy is entering a period of sustainable expansion and inflationary pressure is beginning to build up. This would lead to higher interest rates, which would undermine the dollar's role as a borrowing currency of choice.
Investors, spurred by near-zero U.S. interest rates and easy availability of funds, have borrowed huge sums of money in U.S. dollars to purchase assets where returns are higher. We see the trend using the dollar to finance carry trades is not about to change. It is premature to conclude that the dollar bear market has ended. We think from a long-term perspective, the Federal Reserve will remain concerned about the inflationary pressures and will be very cautious about monetary policy.
 Raising interest rates would increase returns on dollar assets and make them more attractive again to investors, but the result of U.S. data is still not strong enough to change expectations that tightening will not begin before the second half of 2010. Even if the Federal Reserve does start tightening, interest rates are unlikely to go up too fast. Aside from a low-interest rate scenario, negative factors weighing on the dollar still persist. The fact that a lot of the central banks would still want to sell U.S. dollars because they have accumulated far too much of the currency. Concerns about record fiscal deficits, resulting from the U.S. borrowing hundreds of billions of dollars to resuscitate an economy ravaged by the global financial crisis, have further weakened demand for assets, making it likely U.S. dollar will weaken further.
The U.S. dollar's weakness has become a political football in the U.S., as opponents of the Obama administration charge that fiscal policy is hurting the U.S. economy. Other countries have also become increasingly vocal about the dollar's decline. Even Federal Reserve Chairman Ben Bernanke commented on the dollar, saying that the Federal Reserve does watch the dollar's value. There is growing nervousness that the rally in risky assets is overdone, with investors questioning whether the rebound in the global economy can go on without government support. A lot of good news is already priced in. For the U.S. dollar to meaningfully break below current levels, we will probably have to see something that adds significantly to the already upbeat outlook for the global economy. Bernanke said that the U.S. central bank is monitoring currency markets closely and is attentive to the implications of a falling dollar. His comments helped boost the dollar. But there is nothing credible behind his expressing concerns about the U.S. dollar as the Federal Reserve has pledged to keep interest rates low for an extended period. And more good economic news could hasten more bets against the greenback. However, if stocks begin to retreat, the U.S. dollar could stabilize. The decline in U.S. currency has been orderly in recent months. Even we expect the greenback will remain weak in the first quarter, but we do not think its decline will accelerate.
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Source：Mr. Ho Ching Yiu, Treasury Product Manager
Treasury Product Management (Fund), Global Markets Department, BOCHK
Information provided on 13 January 2010 |
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Risk Disclosure:
This document is prepared for reference purpose only. The above views are the personal opinions of the author. The content herein is not intended to provide professional or investment advice and should not be relied upon as such. This document is prepared on the basis of materials obtained from sources believed to be reliable but accepts no liability in relation to the use of this document or the content herein for any purpose. The Bank does not make any representation or warranty and accept no responsibility or liability as to the accuracy, completeness or correctness of the content herein. The content herein is subject to change without notice. You are advised to seek independent financial and professional advice before you trade or invest. You should carefully consider whether trading or investment is suitable in light of your own financial position and investment objectives. This document does not constitute an offer or an invitation to any person to sell, purchase, subscribe or transact any product or service mentioned herein. Investment involves risk. The prices of securities, funds and other investment products may fluctuate, sometimes dramatically. The price of securities, funds and other investment products may move up or down, and may become valueless. It is likely that losses will be incurred rather than profits made as a result of buying and selling securities, funds and other investment products. Past performance is not indicative of future performance. You should carefully read the offering documents for details before making any investment decision. The Bank, its related companies, their directors and/or employees may have positions in, and may effect transaction in, the products and services mentioned herein. Foreign currency investments are subject to exchange rate fluctuations which may provide both opportunities and risks. The fluctuation in the exchange rate of foreign currency may result in losses in the event that the customer converts the foreign currency into Hong Kong dollars or other foreign currencies. Bank of China (Hong Kong) Limited will not be liable for the quality of products and services provided by the participating merchants. The tables and diagrams are for reference only. |
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