• Current-account flows may outweigh interest-rate outlook
  • Asset manager, custodian holds contrarian view for currencies

The dollar’s decline has only just begun, according to a unit of State Street Corp.

After falling a third week versus the euro, the U.S. currency will slump as much as 3.6 percent to $1.18 per euro by year-end, Lee Ferridge, head of macro strategy for North America at State Street Global Markets, said Friday. SSGM’s parent company had $28.7 trillion in assets under custody and administration, as well as $2.4 trillion in assets under management, as of June 30.

The greenback will also decline a similar amount to 115 yen during the same period, Ferridge said by phone from Boston.

Trade flows are increasingly dictating the path of the dollar as investors scale back expectations for the Federal Reserve’s first interest-rate increase since 2006 that had lured capital to the world’s largest economy. The balance of exports and imports is instead coming to the fore as current-account surpluses in Europe and Japan contrast with a deficit in the U.S. That’s limiting demand for the greenback.

“If you’ve got stasis in terms of the monetary policy, then the current accounts start to matter,” Ferridge said in an interview. “That makes life very difficult for the dollar.”

Market Forces

Futures contracts show a 32 percent likelihood that the Fed will raise rates by its December meeting, down from 64 percent a month ago. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

The U.S. currency has already fallen almost 9 percent from a more than 12-year high versus the euro reached in March. The yen has also rallied, adding about 5 percent from a 13-year low.

Ferridge’s forecasts contrast with the median estimate of more than 60 analysts surveyed by Bloomberg News, who put the euro at $1.09 on Dec. 31 and the yen at 122 per dollar.

“When the expectation was the Fed was going to be hiking when no one else was, and you had one- and two-year rates in the U.S. significantly above everywhere else, that works, and you see the dollar go up,” Ferridge said. “But as those have come out, the trade gets that much harder for the dollar.”

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