(Bloomberg) -- Three key dynamics that drove the dollar higher last year look set to reverse in 2019, arguing for the U.S. currency’s depreciation, according to Morgan Stanley.
“A cyclical slowdown in the rest of the world, rising risks of protectionism and a loose fiscal, tight monetary policy mix in the U.S.” propelled the greenback last year, Morgan Stanley strategists led by Hans Redeker in London wrote in a note Thursday. “2019 is looking like a reversal of 2018.”
- U.S. policies are shifting, with the Federal Reserve calling off further interest-rate hikes and planning to halt its bond-portfolio wind-down in a couple of quarters. On the fiscal side, this year won’t see a repeat of the tax-cut jolt applied last year.
- Trade tensions are de-escalating, with Sino-American negotiations at a high level and at least some prospect of a deal that rolls back tariff hikes in time.
- China’s stimulus measures are expected to pay off with a pick-up, or at least a stabilization, in economic growth in coming months. That in turn should help the trade-dependent euro region, where some indicators have turned more positive lately.
“Markets seem unprepared” for these three dynamics to generate a self-reinforcing cycle of dollar weakness, Redeker and his team argued, pointing to metrics such as implied volatility in dollar-yen. “We think that markets are considerably under-pricing the non-linearity of these self-reinforcing dynamics.”
The Morgan Stanley group also pointed to a longer-term dynamic that may hurt the dollar and U.S. assets more generally: a global shift toward dis-saving. Current-account surplus nations including Japan and China have been seeing those excesses diminish. That leaves less to plow back into U.S. capital markets.
“The U.S. looks vulnerable” thanks to high net foreign liabilities, Redeker and his colleagues wrote. The U.S. is the world’s largest net debtor.
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