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Looming deficits make managers doubt strong dollar will continue

BNP Paribas Asset Management’s Daniel Morris

Money managers are split as to whether the current dollar strength can continue, particularly as the market faces twin deficits.

The U.S.'s fiscal and budgetary deficits should be weighing on the dollar's strength, some executives said. But in the past month, the U.S. dollar has strengthened against the euro, to $1.17 as of May 25, from $1.21 at May 1 and $1.20 on Jan. 1.

"The dollar is the highest yielder" in the Group of 10 countries, said Richard Benson, head of portfolio investments at Millennium Global Investments Ltd. in London. "It is priced to be the place with the biggest increase in rates in the G-10 in the next 12 months; in the next two years; and in our view is the most underpriced central bank in the G10 in the next two years. The story is good now, gets better, and we think even better compared to all of that. But the structural (factors) do remain quite negative. The dollar has never been the highest yielder in the G-10," he added.

Roger Hallam, chief investment officer-currency at J.P. Morgan Asset Management (JPM) in London, said executives at the firm see "quite divergent U.S. dollar performance going forward." The firm expects three to four rate hikes by the Federal Reserve this year, and thinks the U.S. economy will remain strong with supportive fiscal stimulus.

"However, we still think the U.S. dollar will struggle against the reserve currencies, predominantly the euro and also (renminbi) because of ... rising twin deficits," and as the European Central Bank approaches the end of its asset purchase program and gears up for a rate hike potentially in the middle of 2019.

Daniel Morris, senior investment strategist at BNP Paribas Asset Management in London, said the dollar could strengthen further in the short term "but ultimately I think it will revert to the depreciating trend we had before. I don't expect it to go a whole lot further for a whole lot longer, but it could."

A continued strengthening of the dollar is not in the cards for Amundi's Vincent Mortier, deputy chief investment officer in Paris. "Our target for the end of the year is $1.25 vs. the euro. Fundamentally we don't see why it should not go back to (that level,) because when we look at it there are some good reasons for the dollar to weaken: the biggest one being the twin deficits," he said.

And Insight Investment is "agnostic on the dollar — we are mindful that the U.S. is having a fiscal expansion pretty much at the time you don't want it," said Adrian Grey, head of fixed income in London.