World Economy

Is the Dollar Power Over?

Is the Dollar Power Over?Is the Dollar Power Over?

Investors seeking an edge in foreign exchange markets are playing down the dollar’s role in their portfolios, reflecting diminished expectations in 2016 for the US currency following a sustained two-year rally.

Many traders are instead scouring the globe for currencies that appear mispriced, based either on the exchange rates in similar nations or on the economic expectations for any given country. In doing so they are reviving an approach that long was standard in this market but recently became less popular as portfolio managers flocked to position themselves for a long-awaited Federal Reserve rate increase, Nasdaq reported.

“The years of dollar strength are probably behind us,” said Jorge Mariscal, chief investment officer of emerging markets at UBS Wealth Management, which oversees $1.9 trillion. “We don’t expect a very large appreciation of the dollar against many other currencies anymore.”

Mariscal recommends clients buy the Philippine peso against the Indonesian rupiah. It’s a bet that the Philippines’ economy and trade balance will improve after years of structural reforms while Indonesia, an exporter of palm oil and other commodities, continues to struggle as Chinese demand slows.

The dollar appreciated against all other major currencies in 2014, Deutsche Bank data shows, as the Fed wound down its bond-buying program amid a gradual recovery in the US. Although the buck’s ascent was less smooth in 2015, expectations of higher rates still drove the dollar up versus all other main currencies except for the Swiss franc, where it has been flat.

With the first Fed rate increase since the financial crisis, however, “there’s not much more juice to extract from this dollar trade,” said Ugo Lancioni, head of currency management at Neuberger Berman, which oversees $237 billion.

Lancioni said his dollar position is just 30% of its former size. He prefers betting that the Swiss franc will decline against the currencies of Scandinavian countries. The Swiss National Bank will eventually need to rein in the strong franc, which gained almost 11% in 2015 against the euro, the currency of Switzerland’s main trading partner, Lancioni said. Meanwhile, the weakened krone has helped soften the blow of lower oil prices to Norway’s economy, while Sweden’s manufacturing sector is showing signs of improvement, making the Scandinavian currencies attractive bets, Neuberger Berman said in a report.

This time, there is little indication that the Bank of Japan, European Central Bank or the People’s Bank of China are anywhere close to pulling back on stimulus, said Paul Lambert, head of currency at London-based asset managers Insight Investment. All three have boosted stimulus measures in recent months.

Others, however, believe that the market has already factored in the divergence in rates, which they say will likely limit dollar appreciation. The euro is down around 0.6% against the dollar since the Fed raised rates on Dec. 16.