Baku, Azerbaijan, Oct.24
By Leman Zeynalova – Trend:
Nothing will end a strong US dollar more quickly than further dollar strength because the world simply can’t afford a stronger USD for long – and if it can’t, it won’t, Saxo Bank told Trend in response to the question about the possibility of dollar's depreciation against euro.
“Our main thesis is that the direction of the US dollar remains the key driver of the action as we go from the late US monetary policy cycle to potentially the end of that cycle in a more concentrated and immediate timeframe than the market or the Fed anticipates,” said the bank.
In Q3, the world saw much of emerging markets(Ems) bending under the weight of a stronger USD and higher US rates, and the Turkish lira and Argentine peso suffered outright breaks while other current account weaklings in EMs like Indonesia and India were under severe pressure.
“If the USD does not weaken from here, we will move into a phase of default and USD-denominated debt repudiation that will mark first the end of the USD’s ‘Reign of Terror’, and second a more profound search for global currency alternatives that is already under way,” said Saxo Bank.
The bank believes that higher rates will eventually put the brakes on the US recovery, something that may be already happening as Q4 gets under way. “This may be the quarter in which the USD finds a local top, if it
hasn’t already.”
As for the euro, Saxo Bank said the euro badly wants to rally from undervalued levels against the USD as the European Central Bank’s quantitative easing policy draws to a close.
“It’s doubly unfortunate for the eurozone to see global economic weakness as it is the single economic bloc with the largest current account surplus to the world, which makes it the most sensitive to the trajectory of global growth. But this does not necessarily mean that we will see a weak euro,” said the bank.
After the populist surge of recent election cycles across Europe, and with the prospect of European Union parliamentary elections next May, it is rapidly time for EU politicians to counter the populist threat, according to Saxo Bank.
“In this case, to stand and fight would mean injecting fiscal stimulus, which Germany will inevitably open up for once its economy clearly comes under pressure. So rather than tight fiscal and easy monetary policy, we will see the EU moving toward tighter monetary policy and easier fiscal policy – a more currency-positive outcome. Yes, there is room for bumps along the way and another round or two of euro stress if Italy’s 2019 budget problem isn’t quickly settled in Q4, but once we get a core EU buy-in on easier fiscal policy, this could prove highly euro-positive.”
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