LIVE MARKETS-Time to go back into the US dollar?

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TIME TO GO BACK INTO THE US DOLLAR?

A steep selloff this year has sent the U.S. dollar down around 8.5% against a basket of currencies, with the dollar index =USD reaching a three-year low earlier this week.

Now, some strategists say the move has likely played out for at least the near-term and it’s time to take another look at the currency.

“The recent “Sell America” move is overdone,” Felix-Antoine Vezina-Poirier, Strategist at BCA Research said in a note.

“During April’s market turmoil, the dollar failed to act as a safe haven, with US equities, bonds, and the DXY all falling in tandem. At one point, even rising US yield differentials could not lift the currency,” Vezina-Poirier said.

“However, we expect safe-haven flows to return to the dollar once recession risks crystallize, given the absence of short-term credible alternatives.”

Shivaan Tandon, markets economist at Capital Economics, meanwhile expects the U.S. dollar will recover some lost ground in the coming months “as its usual relationship with rate differentials reasserts itself.”

Recent dollar weakness “runs contrary to economic theory and the experience of the 2018-19 US-China trade war, both of which had suggested that the imposition of tariffs should cause the dollar to strengthen,” he said.

The greenback has also weakened since the April 2 “Liberation Day” despite U.S. Treasury yield increases.

Near-term, Tandon expects the U.S. currency to gain as interest rate differentials move back in its favor and argues that tariffs will lead to higher inflation that will keep the Federal Reserve on hold this year.

(Karen Brettell)

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