Dollar Luster Dims for Investors Managing More Than $1 Trillion

  • Amundi, Axa expect greenback gains against euro to slow
  • Bloomberg survey shows U.S. currency advancing 3.4% in 2016

The dollar’s unprecedented run against the euro over the past 18 months is set to run out of steam in 2016, according to two of Europe’s biggest money managers.

Following a 26 percent advance in the span, Amundi SA and Axa Investment Managers say the dollar’s strength will constrain the Federal Reserve’s ability to boost borrowing costs aggressively next year, after it raised rates this week for the first time in almost a decade. Strategists surveyed by Bloomberg forecast gains in the U.S. currency will slow to 3.4 percent against the euro in 2016. The year-end median forecast of $1.05 shows little conviction that the dollar will be able to strengthen past $1.0458, the 12-year high reached in March.

Reasons for dollar caution were reflected by Fed Chair Janet Yellen Dec. 16 during her news conference. The strengthening greenback is one of the main reasons the pace of policy tightening will be “gradual,” as it will "hold down import prices that spills over into core inflation," she said.

"Against the major currencies, I think the room for the dollar to appreciate more is quite limited," said James Kwok, head of currency management at Amundi, the biggest publicly traded money manager in Europe by assets. The Paris-based firm oversees 952 billion euros ($1.03 trillion).

The dollar rose 1.1 percent last week to $1.0868 against the euro. The greenback has gained 11 percent versus the common currency this year.

The tepid outlook for the dollar is shared by David Page, senior economist at Paris-based Axa, which oversees $747 billion.  

The Federal Open Market Committee raised its target for the federal funds rate to between 0.25 and 0.5 percent from near zero on Dec. 16, where it had been since 2008. Hedge funds and other large speculators reduced net futures positions that profit from gains in the dollar versus the single currency to 159,961 contracts on Dec. 15, from 172,331 contracts a week earlier, according to Commodity Futures Trading Commission data.

Market Positions

The bet on a stronger dollar against the euro has been one of the most popular trades of 2015. Investors wagered better growth prospect in the U.S. would prompt Fed tightening, while the European Central Bank would cut rates and buy bonds in a bid to revive inflation. Historically, the euro-dollar exchange rate has a strong correlation with short-term interest-rate differentials.

That trade faded late in the year after U.S. policy makers stressed the pace of interest-rate increases would be gradual and the ECB announced stimulus measures that were less aggressive than some investors anticipated.

The next round of U.S. dollar strength will come from gains against the nation’s largest trading partners, mostly emerging markets, said Axa’s Page.  

The currencies of China, Canada and Mexico are poised to weaken versus the dollar next year, as forecast by strategists surveyed by Bloomberg. An economic slowdown in China and dwindling demand for commodities worldwide will propel the greenback higher, Axa said.

"The weakness in commodities is something that’s going to be here for quite some time," Page said. "We’ll see all of those commodity-producing economies and therefore their currencies, continue to be under pressure."

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