Investors' 4 possible reasons for continued USD devaluation: Bloomberg

By Al Mayadeen English
Source: Bloomberg + Al Mayadeen English
24 Apr 2023 18:27
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A Bloomberg report highlights reasons as to why investors, based on a survey, believe the USD will continue to slide downward, drawing back on references from the 2011 showdown.

The seal of the Board of Governors of the United States Federal Reserve System displayed on the ground at the Marriner S. Eccles Federal Reserve Board Building in Washington, Feb. 5, 2018 (AP)

Professional investors anticipate a further decline in the value of the dollar from its two-decade highs reached last year, a Bloomberg report explained, as the market has underpriced the Federal Reserve's impending easing cycle.

According to the most recent MLIV Pulse survey, 87% of 331 survey participants anticipated the Fed to drop interest rates to 3% or below as part of a loosening that 40% believe could begin this year. In contrast, market pricing places the estimated policy rate in two years at about 3.05%.

With a 17 percentage-point gap difference between bears and bulls, Bloomberg reported, professional investors, like most survey correspondents, are bearish on the dollar; meaning that they are associated with falling share prices in the stock market.

Several investors clearly indicated that they are negative because the yield path is priced excessively high. The second most common response, which is interesting, predicted that the US would experience the majority of the financial sector's difficulties. This suggests that the Fed will be obliged to adopt a more dovish stance, as opposed to a hawkish standpoint, than its global counterparts.

Moreover, the Bloomberg report cited historical precedent for the Fed's current decision-making process in which the Fed made significant cuts without other central banks following suit. Early in the 2000s, it said, during the tech crash, and in the year before Lehman Brothers went bankrupt, US monetary policy sharply deviated from that of its international counterparts.

In the latter scenario, pertaining to the Lehman Brothers, the Fed dropped interest rates by 325 basis points between August 2007 and April 2008, while the ECB notably raised rates by 25 basis points in July 2008 – a time when the dollar was extremely weak before the Lehman collapse.

Global policies and impact

It is worth noting, as revealed in the Bloomberg report, that the pessimistic view toward the dollar is grounded in the belief that the appreciation of either the yen or yuan will be the primary cause for the decline of the dollar.

Within a decade, Bloomberg reported, a majority of respondents claimed that the dollar has made up less than half of the global reserves. As such, investors, globally, expect a greater pivot away from the USD, forcing them to give the possibility more serious consideration.

However, Bloomberg's report underlined that market bulls continue to be proponents of the dollar, notably within the retail sector. That being said, the Fed rate path has actually been underpriced, according to a sizable majority of market bulls, supporting the idea that achieving the right policy decision will ultimately be determined by the direction the currency takes.

Surprisingly, Bloomberg highlighted, the threat of a debt-ceiling default continued to be virtually entirely ignored. Few would disagree, though, that the political climate has become exceptionally contentious and that the risks are as high as they have been for many years. The greatest benchmark to use to predict market movement once it is faced with a severe catastrophe goes back to the 2011 showdown. Yields had fallen dramatically at the time, but the dollar had gained as risk aversion dominated investors' decision-making.

US to intervene in the market to counteract non-bank financial firms

On April 21, US Treasure Secretary Janet Yellen announced that the US will adopt increasingly interventionist policies to mitigate risks posed by non-bank financial firms.

"We are proposing revisions to certain elements of the Council’s [FSOC] existing guidance that have made it difficult to use its nonbank designation authority," Yellen said.

"The designation tool serves as an important part of our post-Global Financial Crisis defense. It is an important preventative tool to address systemic risks that may arise from a nonbank financial firm whose activities or distress could threaten the financial system. We are acting today to restore the effectiveness of this authority."

The collapse of SVB and Signature Bank, last month, shook the American market causing instability in the banking industry. A close inspection showed that the collapse was caused by poor administration which prioritized short-term profits.

Yellen stressed that the Financial Stability Oversight Council (which is staffed by prominent financial regulators including Yellen herself) needs to remove "inappropriate hurdles" to subject all non-bank financial firms to supervision.

"The March banking turmoil demonstrates that more work is needed to strengthen the regulatory and supervisory regimes," she added.

Yellen noted, however, that the banking system has eventually stabilized since the crisis last March.

Nevertheless, the FSOC needs to remain vigilant and closely monitor financial system conditions.