Photographer: Scott Eells/Bloomberg
Don't Be Fooled by These Three Dollar MythsBy
Stay bearish on the dollar.
That’s the recommendation of George Saravelos, global co-head of FX research at Deutsche Bank AG, whose latest report gives a point-by-point rebuttal to doubters of the bank’s weak greenback view.
The currency has fallen 3.5 percent this month, adding to a loss of almost 9 percent last year amid speculation that global economic growth will prompt central banks to follow the Federal Reserve in removing monetary accommodation.
Here’s a summary of the analyst’s responses to three so-called dollar myths:
Myth #1: The currency consensus is short dollars
“We disagree,” he writes. Adjusting for growing trading volumes, aggregate bearish dollar positions are close to flat, in his analysis. Long euro-dollar positions have only risen halfway to their previous peak, while options selling only accounts for about a third of previous historical extremes of dollar buying.
Myth #2: U.S. rates favor a stronger dollar
The greenback’s yield advantage over the rest of the world isn’t as big as rates suggest. That’s because “the yield curve is unusually flat and term premium extremely low,” he said. European investors are underweight domestic assets, and U.S. fixed income is unattractive for investors there compared with the yield offered in peripheral Europe.
Myth #3: Repatriation will cause a wave of dollar-buying
The vast majority of U.S. corporations’ offshore earnings are already held in dollars. In the tax plan, “all offshore earnings are ‘deemed’ repatriated and hence taxed irrespective of whether earnings are brought back or not,” Saravelos writes. “This creates no immediate repatriation incentive.” And most companies would have reduced their currency exposure given the tax plan was so widely signposted in advance.