With Europe To Blame, Dollar Will Fall Further, Says UBS

Dominic Schnider, head of Asia-Pacific foreign exchange at UBS said in a TV interview that with further weakness likely ahead the dollar’s recent downdraft hasn’t ended.

Trading as high as 100.47 in Asia trade, the dollar index, which measures the greenback against a basket of currencies, was trading as high as 100.47 in Asia trade. While being off levels around 100.50 touched in U.S. hours Thursday, that’s still up from as low as 100.01 in Asia trade on Thursday.

In an interview with The Wall Street Journal, U.S. President Donald Trump complained the currency was “getting too strong” and that caused the index to take a hit after it was above 101 early last week. Schnider expected the dollar would fall further.

“The starting point for the dollar into 2017 was just very, very rich in terms of valuation,” he said. In January, the dollar index climbed over 103.

“As we see more disappointment, from Trump’s policies and at the same time, the world outside the U.S. looks better, I think we’re still going to see that continuation of dollar weakness. It’s not going to be a weak currency, but the dollar continues to slide on a trade-weighted basis,” Schnider said.

The greenback would see a “mid-single-digit decline” on a trade-weighted basis, heh expected.

He noted that the relative weakness can mainly be laid at Europe’s door. The dollar index is heavily weighted toward the group.

“We do think the euro is heavily undervalued, with a chance that actually the ECB might taper in the second half of the year, then the euro/dollar should see a decent recovery,” he said.

While analysts have expected that would cease next year, or even earlier, if the economy continued to show improvement, the European Central Bank has planned to buy 60 billion euros of bonds every month this year.

“That gives on a trade-weighted basis, quite a down draft” for the dollar, he said. “At the same time, we do think some of the Asian currencies could still go a little bit given that on the cyclical side, we do look much better. ”

Schnider didn’t believe that would affect his forecast, even as the U.S. Federal Reserve appeared to be the only major central bank poised to raise interest rates. That would appear to provide a tailwind for the dollar.

“Higher rates per se do not always translate into a stronger currency,” he said. “The starting point is very important. The dollar was massively overvalued. We’re just going to see some correction of that overvaluation.”

Some shocks could derail his view, Schnider noted, to be sure. He said that the dollar would probably get boosted if the U.S. passed a tax reform that included a border-adjustment tax, which would penalize imports into the country. He however added that he gave that a “really small probability.”

For Trump’s ability to push policy changes through Congress, analysts have adjusted their expectations downward.

In a development that some analysts labelled a “fiasco,” broadly raising doubts about the administration, Trump failed to usher a Republican health-care reform bill through a seemingly friendly Congress last month.

At least partially responsible for the recent market rallies had bene the expectations that a Trump administration would boost infrastructure spending and reform tax policies.

(Adapted from CNBC)

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