Once again Wall Street is betting that the great dollar correction is going to begin. So is it true that dollar is actually in the middle of great correction? Or it is just that it’s a normal news trying to take hype in the exchange markets?
The trend of the market strategists, brokers and investors tend to be on the latter side of the wager. The reason behind this notion is driven by the fact that all the largest central banks of the world have simply given up on making efforts to make exchange rate to be correctly influenced by the monetary policy. This has happened due to large number of reasons that have its linkages from the past.
However, in this interim, the most recent uptick in the inflation rate of United States is engulfing the real interest rate differential which is the difference between the returns on the US dollar denominated assets and the prices of those assets in the foreign currency after inflation adjustment.
To make long story short, with the rise in the inflation, the returns on US denominated assets will decline as compared to their relative prices in the foreign currencies and the dollar would become less attractive for the local as well as foreign investors and dollar would be weaken even more.
The data reported by Futures Trading Commission this Friday shows that the aggregate of the total bets on the notion that dollar will appreciate has dwindled to its lowest level since the mid of July.
The head of the global currency strategy, Vasileios Gkionakis stated at UniCredit Bank that the central banks of the world are stepping back from their obsession of currency and that they are coming out of this massive overvaluation of dollar.
According to Vasileios Gkionakis at first, the dollar appreciation wagering was fueled by the expectations of the investors that with the increase in the interest rates, the US dollar will go up as the relative interest rates of other countries would go down which will broaden the interest rate differential of US with the rest of the world. However, even these expectations swiftly got out of hands. In the first half of year 2015, the pair of Euro-Dollar bottomed out to as low as USD 1.50. This value was much lower to even justify than the expectations for the policy divergence.
After this entire scenario the investors are re-assessing the stance for their greenback currency. The head of the global currency expects the dollar to drift downwards in the upcoming years even in the condition when the US interest rates would boost up. This may be because the dollar has already been priced in standardization in monetary policy more than what the returns on treasury bills reflect it to be.
There is no coincidence. The weakening of dollar is happening just because of the pitfalls of the ultimate shifts in the way monetary policies are designed and conducted by the central banks for negative interest rate. Moreover there are further potential risks that are yet to be foreseen due to the negative rates of other countries. According to Bill Gross, one of the great bond investors, the negative rates would do nothing but put out downward pressure on the entire financial system.
However, Gkionakis has keenly noted that there is an additional risk attached to his perspective. There could be a rebound in US growth more rapidly than expected as a result of the ongoing trend. For this the gains and returns on the investment have to be strong enough to influence the investors to invest in the speedy fluctuations of interest rate.
There are still a large number of currency strategists and investors who are with the notion that dollar will strengthen by the end of the year. They believe that weakening of dollar would be short-term and temporary. The global strategists of Bank of America believe that they foresee Euro finishing the year with equivalent fate as dollar.
However, the recent uptick in US inflation and expectations regarding pickup in inflation would probably continue to weigh the dollar in the near future. According to Bank of America, the current trend of the policy divergence would again drive the US growth to outperform. They believe that soon the world would see investors rushing towards the dollar with euro equally competing in the market for the first time since 2002.