Hedge fund giant sees trade war fuelling US dollar rally

Sydney

DON'T bet on the US dollar rally ending any time soon, says the world's largest publicly traded hedge fund.

While investment titans such as Morgan Stanley and State Street Corp wager the greenback's rally this year is just about finished, Man Group plc reckons it may have further to go. The escalating trade war between the US and China may only fuel the US dollar's strength, not stymie it, according to Guillermo Osses, head of emerging markets debt strategies at Man Group GLG, a unit of the fund.

"From a longer term perspective, the US is potentially on track to impose a meaningful amount of tariffs on China, which may have a transmission to all those countries that sell into China, including Europe," said New York-based Mr Osses. "On a trade-weighted basis, you may continue to see dollar appreciation, especially relative to the euro."

The US currency will strengthen especially if the euro, which makes up about two-thirds of the dollar index, weakens because of any potential slowdown in Chinese demand for European products amid the trade war, according to Mr Osses.

The fund manager's view clashes with a growing chorus of financial giants including Wells Fargo & Co and JPMorgan Private Bank that argue the greenback is nearing its peak as the factors that fuelled its stellar run are being exhausted. They posit that US growth is waning just when other central banks are shuffling closer to winding back ultra-loose monetary policy. Morgan Stanley's global head of FX strategy Hans Redeker reckons the US dollar is "due to re-enter its secular downtrend soon" after gaining more than 5 per cent since mid-April.

The greenback's resurgence - helped by rising US interest rates and Treasury yields - has prompted US President Donald Trump to jawbone the currency in an effort to cool its advance. That's not deterring speculative investors such as hedge funds, which have accumulated close to the most net bullish position on the US dollar since February 2017 as they bet on further gains.

Mr Osses helps manage US$114 billion at Man Group.

He also believes China would potentially be better served by expanding fiscal policy to neutralise the contractionary effect that these tariffs are going to have. The country is at a "tricky juncture" right now after permitting its currency to weaken against the US dollar as part of policy efforts to gain the upper hand on trade. BLOOMBERG