The Strategist

Societe Generale: Place your stake on the US dollar

09/09/2016 - 16:13

The US dollar will most likely strengthen of all G10 currencies, said analysts of Societe Generale.
Analysts at Societe Generale believe that the dollar is most likely to strengthen among all G10 currencies. The hypothesis is based on a fact that too small volume of the USA Federal Reserve System’s possible policy tightening is now incorporated in the foreign exchange market quotations.

According to analysts of SG, before the end of 2017 the Fed will raise the rate one time with a probability of 39%, and twice with a probability of 25%. Analysts estimated likelihood that the agency would leave the rates at the current 0.5% level at 24%. The office has repeatedly postponed its decision to raise the rates, which exerted downward pressure on the dollar. However, analysts believe, it will not last long.

Investors expect that management of the Federal Reserve System of the USA (Fed) may decide to raise short-term interest rates in September 2016, which will make investments in assets denominated in US dollars more attractive, writes The Wall Street Journal (WSJ). 

Investor expectations have led to a remarkable strengthening of the dollar. August 26 was marked by the largest over the past two months leap of WSJ Dollar Index, which documents movement of the dollar in relation to 16 major currencies.

"There is a period of strengthening of the dollar waiting for us", - said a currency strategist at BNP Paribas in North America.

According to forecast of BNP Paribas, the dollar - euro pair will rise a further 1.7% (approximately € 0.9 to the dollar) by the end of 2016, and the dollar - yen pair is expected to jump by 6% (up to ¥ 108 to the dollar).

Strengthening of the dollar could benefit Europe and Japan, for which appreciation of local currencies means loss of competitiveness, notes the WSJ. At the same time, strengthening of the US currency may hit developing countries, primarily Brazil and Turkey. This year, companies from those regions attracted billions of dollars in loans from investors. Increasing US currency makes servicing dollar-denominated loans more expensive, which may lead to a "broad and indiscriminate" sale of assets.

Another consequence of strengthening of the US currency could be a drop in world prices for commodities, which are traditionally priced in dollars. Pressure from the strengthening dollar, according to the WSJ’s estimates, could reduce demand for oil and other raw materials, and start a new cycle of lower prices.

"The market finds it difficult to understand which path the Fed will choose. We definitely believe that the dollar will be all right, but it is unlikely that the recovery will be really great", - said a portfolio manager at Canadian AGF Investments Tom Nakamura.