Currency outlook: Possible global central bank policy surprises could suppress US dollar

Invesco Fixed Income shares its views on currencies around the world

Time to read: 2 min

US dollar:

We expect the US dollar to weaken throughout 2018. We base our view on positive global growth and predicted changes in global monetary policy. While we believe US growth will maintain its strengthening trend, growth across the developed world (especially in Europe and Japan) is likely to be even stronger. Global central banks, especially the European Central Bank (ECB) and the Bank of Japan (BOJ), are likely to tighten policy in response. We believe market expectations of policy tightening are currently much lower for the ECB and the BOJ compared to the Federal Reserve, which means there is more room for a market surprise that could cause their currencies to rise against the US dollar. In addition, strong global growth environments have historically led to a weaker US dollar, as US investors seek higher risk premia abroad and non-US investors stay home. We do not believe corporate repatriation flows will be a large driver of US dollar price action. Foreign profits are already largely held in dollar-denominated assets, and repatriation is likely to occur over many years.

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Currency outlook: Global central banks begin to normalize policies

Invesco Fixed Income shares its views of currencies around the world

US dollar:

Our strong global growth view indicates a mixed environment for the US dollar. We expect the US Federal Reserve to hike interest rates two more times in 2017. However, we believe other major central banks have more significant moves to make in terms of normalizing their policies. Global policy normalization should favor currencies of countries whose central banks are scaling back their quantitative easing (QE) programs — for example, the euro versus the US dollar.

Euro:

We continue to be

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Currency outlook: European economic activity continues to improve

Invesco Fixed Income shares its views of currencies around the world

Euro:

Our outlook for the euro remains constructive over the medium term. European economic activity continues to improve and should eventually allow the European Central Bank to pivot on quantitative easing (QE) and embark on tapering. We expect the euro to appreciate in this environment and this may unfold in Q2/Q3 this year. In general, we believe QE has approached its conclusion and policy adjustments going forward are likely to be skewed toward supporting longer-term euro strength.

Renminbi:

We expect the Chinese currency (onshore and offshore) to trade on the

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Currency outlook: US dollar performance could be mixed

Invesco Fixed Income shares its views of currencies around the world

Raymund UyStronger global growth environments, like the current one, are typically mixed for the US dollar. The US Federal Reserve (Fed) demonstrated at its March meeting that it is not aiming to disrupt financial markets. This backdrop — above-potential growth and a benign Fed — should translate into mixed US dollar performance versus developed market currencies, in the view of Invesco Fixed Income. We believe the US dollar should underperform emerging market currencies broadly.

See below for the Invesco Fixed Income team’s outlook for other key world currencies.

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