Hedge fund giant splits with Morgan Stanley on call on dollar peak

Man Group strategist argues that the dollar's rally has further to go amid an escalating trade war

Aug 13, 2018 @ 10:00 am

By Bloomberg News

Don't bet on the U.S. dollar rally ending any time soon, says the world's largest publicly traded hedge fund.

While investment titans such as Morgan Stanley and State Street Corp. wager the greenback's rally this year is just about finished, Man Group reckons it may have further to go. The escalating trade war between the U.S. and China may only fuel the dollar's strength, not stymie it, according to Guillermo Osses, head of emerging markets debt strategies at Man Group GLG, a unit of the fund.

"From a longer term perspective, the U.S. is potentially on track to impose a meaningful amount of tariffs on China which may have a transmission to all those countries that sell into China, including Europe," Mr. Osses said in a telephone interview. "On a trade-weighted basis, you may continue to see dollar appreciation, especially relative to the euro."

The U.S. currency will strengthen especially if the euro, which makes up about two-thirds of the dollar index, weakens because of any potential slowdown in Chinese demand for European products amid the trade war, Mr. Osses said.

The fund manager's view clashes with a growing chorus of financial giants, including Wells Fargo & Co. and JPMorgan Private Bank, that argue the greenback is nearing its peak as the factors that fueled its stellar run are being exhausted. They posit that U.S. growth is waning just when other central banks are shuffling closer to winding back ultra-loose monetary policy.

Morgan Stanley's global head of FX strategy Hans Redeker reckons the dollar is "due to reenter its secular downtrend soon" after gaining more than 5% since mid-April.

The greenback's resurgence — helped by rising U.S. interest rates and Treasury yields — has prompted U.S. President Donald J. Trump to jawbone the currency in an effort to cool its advance. That's not deterring speculative investors such as hedge funds, which have accumulated close to the most net bullish position on the dollar since February 2017 as they bet on further gains.

The Bloomberg Dollar Spot Index climbed to the highest since June 2017 Monday as the financial crisis in Turkey unfolded. The index added to a 0.7% advance on Friday as the Turkish lira tumbled to a record low.

Mr. Osses helps manage $114 billion at Man Group. Here are some of his other views:

China at 'Tricky Juncture'

China would potentially be better served by expanding fiscal policy to neutralize the contractionary effect that these tariffs are going to have. The country is at a "tricky juncture" right now after permitting its currency to weaken against the dollar as part of policy efforts to gain the upper hand on trade.

Treasuries Under Pressure

Given the substantial issuance of longer-duration debt by the U.S. Treasury in the second half of the year and the beginning of the tapering of the European Quantitative Easing, we think that should put pressure on high quality, long-end bonds and eliminate demand for substitute assets. That may in turn put pressure on credit spreads and equity valuations.

Correction Coming

One needs to have meaningful adjustments in risk asset prices because valuations are quite stressed any way you look at it. All the elements seem to be in place for a significant correction in risk assets as a consequence of significant tightening in financial conditions.

Buying Opportunities

Man Group favors some dollar bonds of emerging markets such as Indonesia. In developed markets, the only place we feel that investors are compensated for their risk is in the short end of the Treasury curve.

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