- `The big dollar rally’s over,' says HSBC's David Bloom
- Traders see about 35% chance for Fed's rate hike by March
The dollar will weaken this year against the euro and yen as the European Central Bank and its Japanese counterpart face limits on additional monetary stimulus, according to HSBC Holdings Plc.
The yen has strengthened against the greenback this month, while the euro has remained little changed, after its decline slowed in 2015. Turbulence in global markets emanating from China has fueled concern of a global slowdown and the pace of U.S. interest rate increases this year.
“The big dollar rally’s over,” said David Bloom, the global head of currency strategy who had called the halt to the U.S. currency’s bull run in March. “What we’re seeing is the Fed starting to have to rein in and these other central banks reaching the limit.”
The dollar has tumbled 1.9 percent this year to 117.97 yen and been little changed at $1.0863 per euro as of 7:25 a.m. in London. The greenback is set to weaken further to 115 yen and $1.20 versus the 19-nation shared currency at the end of the year, Bloom said.
The Bank of Japan, which left its main bond-purchase program unchanged on Dec. 18, will refrain from expanding it for the foreseeable future, according to almost half of respondents to a Bloomberg survey last month. The ECB unveiled a package of measures on Dec. 3, extending its quantitative-easing program through March 2017 and lowering the deposit rate by 10 basis points, or 0.10 percentage point, to minus 0.3 percent.
The euro surged the most since 2009 against the dollar on Dec. 3 after additional stimulus measures announced by ECB President Mario Draghi underwhelmed market expectations.
There are limits to quantitative easing and the central banks’ ability to manipulate their currencies lower, Bloom, based in London, said.
The ECB “promised us the Earth and what did we get?” he said. “We got a 10-basis-point rate cut and an extension of QE and the market said: not enough. There’s not much they can do.”
The euro’s decline against the dollar slowed to 10 percent last year, from 12 percent in 2014. Analysts predict about a 2 percent drop in the common currency to $1.06 at the end of this year, according to their median estimate.
Traders are pricing in about a 35 percent chance the Fed will raise interest rates at or before its March meeting, down from 51 percent at the end of last year. The probability is based on the assumption that the effective Fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase.
The ECB raised rates in 2008 and twice in 2011 to combat inflation that quickly evaporated. They echoed mistakes made by the BOJ in 2000, when policy makers raised the key rate only to cut it six months later as deflation set in.
“The Fed has over-egged the pudding and there’s too much that have got priced into rates,” Bloom said. “Other central banks have tried to raise rates and failed, and when the failure has been recognized, their currencies have fallen like a stone.”