Dollar Downfall Has Just Begun for Some of Europe’s Top Funds

With its longest rally in four years all but over, the dollar is falling out of favor with some of Europe’s bellwether funds.

Amundi, the region’s biggest money manager, is betting the greenback is due for a correction as the Federal Reserve shifts toward more dovish policy. Aberdeen Standard Investments says the “tailwinds” that boosted the dollar, such as higher bond yields and strong growth in the U.S., are now dissipating. The currency may extend its slide should this week’s Group-of-20 summit fail to ease global trade tensions, according to UBS Global Wealth Management.

A gauge of the dollar’s strength slumped 1.6% in June, snapping a four-month rally that was the longest since 2015, as Fed Chair Jerome Powell signaled the the central bank is gearing up to cut interest rates to support the world’s largest economy. Benchmark U.S. Treasury yields hit the lowest level since 2016 last week, narrowing the premium over Germany and Japan.

“We expect the dollar to lose some more of its recent strength and deteriorate further,” said Andreas Koenig, head of global foreign exchange at Amundi, which oversees $1.63 trillion in assets. “The market became very one-sided, pro-dollar in terms of sentiment and positioning. The dollar bull cycle seems, in terms of duration and magnitude, very mature and with positioning very long-dollar, a further correction seems likely.”

Credit Suisse Sees a Sell Rally Phenomenon for U.S. Dollar

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U.S. rate differentials versus other markets are now less attractive once adjusted for volatility, according to Koenig, who has short positions in the greenback against “a variety of currencies” including the yen, euro and Canadian dollar.
G-20 in Focus

Leaders of G-20 nations will meet for a two-day summit in Osaka, Japan, starting Friday to hash out differences in trade and currency policies among other topics. The focus lies on U.S. President Donald Trump and his Chinese counterpart Xi Jinping. If they fail to diffuse tensions that have roiled global markets in recent months, the world economy runs the risk of losing $1.2 trillion, according to calculations by Bloomberg Economics.

While prospects of such a “scary result” are small, the outcome of the summit will nonetheless be important for the dollar’s outlook, according to Thomas Flury, head of currency research at UBS Global Wealth.
“If the result of the G-20 meeting confirms markets’ expectation that no new arrangements are ahead, we expect three things: a further deterioration of investment plans, an even stronger likelihood for Fed cuts and consequently a lower greenback,” Flury, whose firm oversees $2.43 trillion, said.

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While UBS Global Wealth has a dollar short position against the yen, it also has tactical strategies in place including a long-greenback allocation versus its Australian counterpart to profit from rising trade tensions and the slowdown in Australia.

Options that will pay out on a yen rally against the dollar total $20 billion notional, including $3 billion on the Japanese currency hitting 105, according to data from the Depository Trust & Clearing Corporation on trades posted since the latest Fed decision. That level could be reached if the G-20 meet disappoints, according to Ken Dickson, an investment director focusing on currencies at Aberdeen Standard.

“Whether or not there is good news from the G-20 meetings, we expect the dollar to underperform haven currencies and riskier, more cyclical currencies in the weeks ahead,” Dickson said. The dollar was boosted earlier by “relative growth and the high U.S. rates. These tailwinds are slowly dissipating. The trade-weighted dollar is past its peak for the time being,” he said.