Tuesday 20 August 2019

Morgan Stanley cuts dollar forecasts versus euro, yen

Kosuke Goto and Patricia Lui

Morgan Stanley, the second-largest U.S. securities firm, cut its forecasts for the dollar against the euro, the yen and the British pound, saying slowing U.S. economic growth will diminish the allure of the nation's assets.

The dollar will fall to $1.55 per euro by June 30, compared with a previous forecast of $1.41, Stephen Jen, head of currency research in London at Morgan Stanley, wrote in a research note yesterday. The dollar will trade at 97 yen and $1.99 per pound by mid-year, versus earlier forecasts of 103 and $1.94, he said.

``The recent sell-off in the dollar is both definitive and justified by economic and policy changes,'' Jen wrote in the note. ``The dollar's weakness is extraordinary.''

The U.S. dollar has declined against 14 of the world's 16 most-actively traded currencies this year on bets the Federal Reserve will continue to cut interest rates to avert a recession. Futures show traders see a 98 percent chance the Fed will lower its target rate 0.75 percentage point to 2.25 percent on March 18. The balance of bets is on a half-point cut.

It dropped to $1.5430 against the euro today, the weakest since the European currency's debut in January 1999, before trading at $1.5379 at 8:18 a.m. in London from $1.5380 in New York yesterday. The U.S. currency fell to $2.0126 per pound from $2.0092. The dollar slumped to 102.33 per dollar, the lowest since Jan. 19, 2005, before trading at 102.83 from 102.67 late yesterday.

European Inflation

The euro rose to a record high against the dollar after European Central Bank President Jean-Claude Trichet yesterday said there is ``strong upward pressure on inflation,'' signaling he's in no hurry to cut interest rates. ECB policy makers left the euro region's main rate at 4 percent, matching the forecast in a Bloomberg News survey.

``While ECB's Trichet had multiple chances to push back on euro strength in the ECB press conference, he did not take the bait,'' Jen wrote. ``His persistent emphasis on upside inflation risks steered the market away from pricing any near-term easing.''

The yen's 9.1 percent rally against the dollar this year will extend as tumbling stocks lead traders to exit so-called carry-trade purchases of higher-yielding securities funded with loans from Japan, according to Morgan Stanley. The yen last traded at 97 per dollar in April 1995.

Asia Currencies

``Risk-motivated corrections could rather easily push dollar-yen below 100,'' Jen wrote. ``We don't believe that 100 is special, except for psychological reasons.''

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between them. The risk is that currency moves erase those profits.

Asian currencies outside of Japan will stay strong in the first half of 2008 on dollar weakness, regional inflationary pressures and limited risk aversion, according to a separate section of the report by Thomas Gade and Stewart Newnham.

Still, gains will may be limited during the second half of this year as ``currency appreciation, monetary tightening and potential consumer woes start to take a toll on the economies,'' according to the report.

The bank revised up forecasts for the Malaysian's ringgit, Singapore's dollar and Taiwan's currency. Those currencies will ``continue to outperform,'' though the bank is cautious about the Taiwan's dollar toward year-end, the report said.

Malaysia, Singapore, China

Malaysia's ringgit will be driven by the political cycle as the nation holds an election tomorrow, according to the bank. The ringgit may reach 3.01 to the dollar by the middle of the year and 2.86 by end of 2008, the report said. The currency is up 4.22 percent so far this year to 3.1733 to the dollar.

Singapore's dollar will be driven by a ``massive surge in inflation'' that will force monetary authorities to keep the currency's trade-weighted basket on an appreciating trend, according to the report.

Morgan Stanley forecasts Singapore's dollar to rise to 1.35 to the dollar in June and 1.29 by year-end. The currency traded at about 1.3861 to the dollar, up 3.69 percent this year.

China's currency should ``outperform'' on expectations the central bank will use a stronger yuan and ``tight'' monetary policy to combat inflation, the report said. The yuan may reach 6.80 to the dollar by the middle of the year, and 6.57 by the end of 2008. The currency is up 2.77 percent this year at 7.1072.

- Bloomberg

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