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Dollar traders see a big sell with Fed's next rate hike

Some say the greenback could fall 10% in 6-9 months; others say it'll sink 3% against the euro by year's end

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The Fed will make a decision on interest rates on Sept 26. Traders await its comments on the impact of rising trade tensions.

New York

WHEN a nation's central bank raises interest rates, it is often a bullish sign for the currency. Not so in the US, where expectations for a Federal Reserve rate hike next week are flashing sell signals for the dollar.

BNP Paribas Asset Management says the broad greenback could plunge 10 per cent in the next six to nine months, while Invesco Ltd forecasts it will sink about 3 per cent against the euro by year-end. Both firms are watching the Fed's Sept 26 decision for any comments on the impact of escalating trade tensions. The two companies also see the currency sliding as other central banks inch closer to monetary tightening.

Momtchil Pojarliev, deputy head of the currencies team at BNP Paribas Asset Management, which manages US$653 billion, said: "We have a turning point where the dollar is going to weaken." The dollar is "at the maximum positive point" and could weaken to US$1.25 per euro in the next six to nine months from around US$1.17 in Wednesday trading. It is also a good time to short the US currency against the yen, he said.

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The market views a 25-basis point Fed rate hike next week as a near certainty, based on Fed fund futures. Contracts on Wednesday showed more than 45 basis points of total tightening by the end of 2018.

Focus is increasingly shifting to the outlook for next year, with investors moving closer to the central bank's projected path of three rate hikes for 2019.

That won't be enough to prop up the greenback, said Noelle Corum, an Atlanta-based portfolio manager in Invesco Ltd's fixed-income group. As global growth improves and market participants start to speculate about policy changes from the European Central Bank and Bank of Japan, the dollar's support from Fed hikes and trade tensions will wear off, she said.

"Going into year-end, we would expect fundamentals will begin to drive markets again, and this will drive the dollar weaker," she said. Her group manages US$235 billion. She forecasts the greenback will depreciate to US$1.20 per euro and weaken to 104 yen per dollar by year-end.

The US currency has risen more than 5 per cent since mid-April, bolstered by a robust economy, gradual tightening by the Fed and haven flows as investors sought refuge from escalating trade tensions. That has been painful for investors who began the year with a bearish mentality following a 8.5 per cent decline last year.

As the dollar started to gain steam this year, speculators piled into bullish bets. Long-dollar wagers are now the third-most crowded trade in financial markets, say fund managers surveyed by Bank of America Merrill Lynch Global Research. And yet, prominent investors including Ray Dalio, who founded the world's biggest hedge fund at Bridgewater Associates, and Jeffrey Gundlach, chief investment officer at DoubleLine Capital, are turning bearish alongside some Wall Street strategists.

Mark McCormick, North American head of FX strategy at Toronto-Dominion Bank, said: "The Fed needs to be taken in the context of other themes like trade. The market anticipates a hike and there is more room to fade the USD as positioning looks well-populated." BLOOMBERG