New York: JPMorgan Chase & Co. strategists said that while the dollar does face further downside, it isn’t caught in the kind of structural decline suggested by Goldman Sachs Group Inc. analysts last week.
“We continue to push back on the idea of a much broader, secular downtrend in the dollar predicated on structural factors,” JPMorgan currency strategists Daniel Hui, Paul Meggyesi and Juan Duran-Vara wrote in an Aug. 7 note. Those include “the U.S. loss of reserve currency status” and a “rehabilitation” of the euro from that region’s growth malaise, they wrote.
JPMorgan said it engaged with clients about concerns about the inflation outlook tied to an expected shift by the Federal Reserve to strengthen efforts to boost price gains. “The emphasis on inflation and attendant currency debasement” intensified thanks to the surging price in gold to record highs, the strategists wrote.
Goldman’s commodity strategists hit that theme last week, saying that there were “real concerns around the longevity of the U.S. dollar as a reserve currency” thanks to American policy triggering “debasement” fears.
The JPMorgan team noted that, indeed, measures of inflation expectations have been picking up lately. And that’s happened alongside a slide in the greenback, which saw its biggest drop in a decade last month.
“It is certainly tempting to conclude that there is a causation at work here,” the strategists wrote. However, it could simply be “coincidental,” thanks to an unwinding of the moves during the heights of the financial strains caused by the Covid-19 crisis, they wrote.
A look back at differences in inflation rates, interest rates and real yields - those adjusted for price changes - indicates that none of them “explain much of the dollar index or most dollar pairs over the past five years,” the JPMorgan strategists wrote.
What will be putting downward pressure on the dollar for now is the failure in Washington to reach a deal on another fiscal-stimulus package, according to the Wall Street bank.
The “fiscal drag” to the economy from the expiration of support including supplemental unemployment insurance payments “should be felt in real-time, and will translate into real-time ongoing downward pressure on the dollar,” the bank wrote.
The team said it’s added a trading recommendation to short the dollar against the yen. But that’s different from a long-term judgment on the greenback.
“The greatest conviction we have is that idiosyncratically driven dollar weakness will be narrow and conditional, rather than broad, sustained and structural,” they wrote.