Forex Signals – Dollar set to extend decline
LONDON (Reuters) – The U.S. dollar “is set to decline further” as the Federal Reserve keeps interest rates very low for years, with policy responses now favouring the euro, money managers at PIMCO said on Tuesday.
PIMCO’s Gene Frieda, Global Strategist, and Sachin Gupta, Head of Global Portfolio Management Desk, noted that in previous depreciation cycles the real trade-weighted dollar had fallen some 15% to 20% relative to current levels, but that even then “the dollar would still only be marginally undervalued based on our estimates.” Forex Signals – Dollar set to extend decline
The dollar on Tuesday hit a new 28-month low (=USD) and the euro approached $1.20 for the first time since 2018.
The U.S. currency’s previous interest rate advantage over rivals has disappeared as the Fed embarked on aggressive policy stimulus, and the PIMCO managers said a huge new recovery fund in the European Union had increased the euro’s attractiveness as an alternative to the greenback.
“We believe that Fed policy will remain accommodative for as long as it takes to bring inflation back to target, “on average,” Frieda and Gupta said in a statement.
“Given our expectation that full employment does not return before mid-2024, this would set the Fed on course for a multi-year period of very low policy rates and asset purchases,” they said, while adding that ongoing uncertainty about the coronavirus pandemic would limit the dollar’s decline.
The Newport Beach, California-based Pacific Investment Management Co (PIMCO) had $1.92 trillion in assets under management at end-June.
The Canadian dollar is showing limited movement in the Tuesday session. In the North American session, the pair is trading at 1.3060, up 10% on the day.
Canada, US Manufacturing PMIs head higher
Manufacturing activity accelerated in August on both sides of the border. Canada’s Manufacturing PMI improved to 55.1, up from 52.9 beforehand. This was the strongest reading since October 2018.
The 50-level separates expansion from expansion. In the US, ISM Manufacturing PMI rose from 54.2 to 56.0, beating the forecast of 54.6. This reading was the highest since January 2019, another sign of growth by the US economy.
The US dollar remains under broad pressure, following remarks from Jerome Powell that the Federal Reserve would allow inflation levels to exceed the two percent target after periods of weakness, as long as “average” inflation levels stay at two percent. The Canadian dollar is coming off an excellent August, with gains of 2.7%. This was the currency’s best monthly performance since June 2019. With the US dollar in a deep rut, the Canadian dollar could enjoy another positive week.