End of Dollar Appreciation

After a year of angst about the Fed raising interest rates and driving the dollar up we are now hearing the experts talk about the end of dollar appreciation. Bloomberg Business reports that UBS Group AG is telling its clients to prepare for dollar rally’s end this next year.

Money managers for Asia’s wealthiest families say they’ll be looking elsewhere for returns after chasing the U.S. dollar’s gains in the past three years.

UBS Group AG, the world’s largest private bank, is telling clients there’s “little room for further dollar appreciation,” said James Purcell, cross-asset strategist at its wealth management business in Hong Kong. Stephen Diggle, who runs a family office in Singapore called Vulpes Investment Management, said U.S. rate increases aren’t enough “to chase a strong dollar.” Stamford Management Pte, which oversees $250 million for Asia’s rich, will review its outlook for greenback gains after expected advances in the first quarter, said Jason Wang, its chief executive officer in the city.

Strategists also predict the dollar’s gains will slow in coming months after the Federal Reserve committed to a gradual pace of tightening. The currency will appreciate about 5 percent to $1.05 per euro by the third quarter of 2016, according to a Bloomberg survey, after surging 10 percent this year. Its advance versus the Japanese currency will be limited to less than 4 percent to 125 yen, after gains slowed to about 0.6 percent in 2015, from more than 10 percent in each of the previous three years.

Is this analysis correct? Are we going to see the end of dollar appreciation? The Fed expects to keep raising interest rates but at a measured pace. Why did the panic of higher rates go away? And, of course, the dollar trades individually against other currencies. The most important currencies against which the dollar trades are the Euro, British pound, Japanese yen, Indian rupee, Russian ruble, Brazilian real, Canadian dollar, Australian dollar and Chinese renminbi. The most unstable relationship for the coming year is probably the USD/RNB.

Whither Goes China and the USD/RNB?

The Econo-Monitor writes about hot money outflows, the USD and the RNB.

As China’s renminbi has been included in the IMF elite currencies and the Fed has started its rate hikes, conventional wisdom sees the RMB weakening and US dollar strengthening as simple long-term trends. The realities are far more complex, however.

In reality, the U.S. dollar’s strengthening relative to the Chinese RMB began around 2013/14; almost two years before joining the IMF basket and the Fed’s rate hikes.

Today, U.S. tightening will escalate “hot money” outflows from many emerging markets, which may soon have to cope with asset shrinkages, deflation and depreciation.

After the Fed’s rate hikes, the RMB’s weakening is anticipated to prevail over the next 12 months; in part, due to China’s slower 6.5% growth target for 2016-20; in part, due to the “One Belt, One Road” initiatives, which imply more outward direct investment from China. In November, China’s foreign reserves declined by $87 billion, although the total still remains at $3.44 trillion.

The point being that from the viewpoint of the USD/RNB we are not going to and end of dollar appreciation in the near future.

The EU and the Euro

The European Union understood too late the need to stimulate its economies and not insist on fiscal austerity to fix the effects of the Great Recession. Now, as the USA is increasing rates the EU is still looking to keep them low and keep printing money. ExchangeRates.org of the UK predicts a fairly stable euro to dollar exchange rate in 2016 with perhaps a slight appreciation of the EUR and the end of dollar appreciation on the scale that we have seen for the last couple of years.

In accordance with CIBC World Markets, the Euro to US Dollar exchange rate is predicted to trend within a range of 1.07 to 1.13 in 2016.

CIBC also predict that the pound to dollar conversion will trend within the range of 1.50 to 1.61 during 2016.

Analysts at ETF Securities forecast that the US Dollar will strengthen over the course of 2016 but that gains will be slower as rising inflationary pressure will see real interest rate differentials narrow.

After a twenty-five percent run up versus a basket of currencies in the last few years it is unlikely that the USD will continue on that course. Rather the USD will likely level off with perhaps an occasional inching up when the Fed decides to raise interest rates.