U.S. Dollar Can Go Even Higher: HSBC

Bloom on the US Dollar

Above: David Bloom, HSBC. File photo. Pound Sterling Live.

- USD recently peaked for the year above 98

- But it could still go even higher, says HSBC

- Robust institutionalism to ensure Fed independence

The U.S. Dollar's long-term 2018-2019 uptrend is still with us, and has in fact got the potential to push even higher says David Bloom, head of FX research at HSBC.

“No, we haven’t traveled too high. You can never get too high, as you know,” says Bloom in an interview with CNBC. “What would you want to buy out there if you don’t want to buy Dollars. Have you seen what it looks like out there? It’s desolation and destruction.”

The Dollar Index - a broad measure of U.S. Dollar performance - appreciated by 9% in the last 12 months and by 2.2% so far this year. In real effective terms, the USD is 5.7% stronger than its 20-year average.

The Index rose to a yearly high of 98.33 on April 26 and has since moderated back to 97.55.

US Dollar daily

The pullback inevitably invites the questions of whether the trend has finally come to an end.

"The USD is historically very strong. Similar USD peaks in the past were the result of rare conditions and did not last. The recent USD peak seems more persistent, as a number of rare events have happened in sequence. A number of tail risks could keep the USD strong for now, but history suggests it is unlikely to persist in the longer term," says Athanasios Vamvakidis, a FX Strategist with Bank of America Merrill Lynch.

The most recent boost came about because of a combination of better economic data, and the Fed chair Powell saying low inflation might be “transitory”.

If Powell is right in his analysis and the inflation starts picking up again it could fuel another Dollar rally.

Bloom sees the Dollar having “plenty of room to move” especially against the Australian Dollar, the New Zealand Dollar, and against some of the emerging market (EM) currencies, too.

Higher inflation is responsible for central banks raising interest rates, which is one of the main drivers of currencies. Higher interest rates drive up currencies by attracting and keeping greater inflows of foreign capital.

Bloom says concerns over the independence of the Federal Reserve as an institution are overblown, saying that the election of a new chairperson was a ‘democratic’ process and unlikely to be affected by intervention or meddling from the President.

Stability at the Fed would be supportive of the U.S. Dollar as policy makers would be expected to avoid buckling to politicians and cut interest rates to help stimulate further economic growth.

Last week President Donald Trump intensified pressure on the Federal Reserve, calling for a 1 point rate cut and more quantitative easing.

Currencies tend to fall when their central bank cuts interest rates, therefore a politically-responsive Fed would, on balance, be a negative for the Greenback.

In December, when the stock market was down, Trump even spoke privately about the possibility of firing Powell.

Some have speculated that the President might be trying to pull strings to affect the election of a more ‘market-friendly’ chairperson.

However, Bloom dismisses the pressures being exerted on the Fed as a reason to doubt the trajectory of the Dollar.

“The institutional framework is incredibly strong and powerful in the United States. You know, you can't just bully your way into the whole thing,” says Bloom. “This is the United States, not some tin-pot country, that’s why I like the Dollar, because the institutional frameworks, I believe, are incredibly robust.”

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