Funds Flock to King Dollar on Wagers Trade Angst Set to Deepen

(Bloomberg) -- The dollar is set to rise out of its current trading range as America’s tariff dispute with China takes a turn for the worse.

That’s according to fund managers who reckon markets are underestimating the risk of a prolonged trade war, which will reinvigorate a hunt for haven assets in a world already hampered by slowing growth. An easy trade will be to short the expected losers: risk-sensitive emerging market currencies from Asia to South America.

“To be honest, I thought the dollar would be rising at a much faster pace than this -- markets were pricing in a Goldilocks environment and they were clearly wrong,” said Stephen Miller, an adviser at asset manager GSFM and a former head of fixed income at BlackRock Inc.’s Australian business. “Right now I’d be long U.S. dollar versus EM currencies, the likes of Argentina and Turkey.”

GSFM joins the likes of Societe Generale and Kapstream Capital in favoring the greenback amid escalating trade tensions between the world’s two largest economies. While the U.S. and China plan to continue negotiations, money managers aren’t optimistic that a quick fix is on the horizon. The uncertainty showed up in the JPMorgan Global FX Volatility Index, which rose as much as 16% last week from its close on May 3, before Trump’s tweets roiled markets.

The Bloomberg Dollar Spot Index has strengthened in the past month -- with the dollar rising against all G-10 currencies except for the Japanese yen, which is a fellow haven asset. The world’s biggest reserve currency has also risen against a basket of developing-nation currencies, which dropped 1.9 percent in the past month, according to a JPMorgan index.

“I’d be long USD against a basket of EM Asia currencies as I think this trade war will continue,” says Raymond Lee, money manager at Kapstream in Sydney. “You can’t solve a lot of these trade issues overnight -- we’ve also gone long rates in general and it’s worked well for us.”

Still, not everyone is convinced the dollar is a sure bet.

The greenback is in the process of peaking as the Federal Reserve becomes more balanced in its monetary policy, according to Manpreet Gill, head of fixed income, currency and commodities strategy at Standard Chartered Plc.

Goldman Sachs Group Inc. is also bearish, seeing dollar downside in the medium term on the expectation of improved European growth and the effect of stimulus from China. Meanwhile, Morgan Stanley reckons the tide may be turning for the currency amid waning support from central banks and a decline in external savings. It is preparing to short the dollar against the yen and euro, strategists led by London-based Hans Redeker wrote in a note.

“Looking ahead, tighter global liquidity conditions seem more likely, which will not bode well for currencies of areas dependent on capital imports like USD,” the strategists said. “The tide may be turning for USD” to the downside.

But count among the dollar bulls Mary Nicola, Singapore-based G-10 FX and Asian fixed-income strategist at Eastspring Investments, which oversees $193 billion. The asset management arm of Prudential Plc is taking a long dollar position versus the euro and other G-10 currencies, partly on yield differentials that are in favor of the U.S.

“We’ve always had a high conviction in U.S. dollars,” she said in an interview with Bloomberg Television. “Now it’s just a little bit harder to be long emerging-market foreign exchange because they’re going to be dealing with a lot of volatility.”

©2019 Bloomberg L.P.