UBS On-Air: Paul Donovan Daily Audio 'Dollar decline without drama'
The desk posits that while the US dollar shows a persistent weakness, the potential for a dramatic decline in its reserve status remains limited. Per the full note from UBS, international investor confidence is wavering due to concerns about the US's rule of law and its decreasing global standing. As trade dynamics shift towards stagnation, the urgency of the dollar’s reserve status is dampening, signaling a potential long-term trend of diminished demand for dollar-denominated assets. This perspective is reinforced by recent observations that international appetite for accumulating additional dollar holdings may be waning, even as the risk of a sudden exodus appears low.
What the desk is arguing
The desk's stance emphasizes that while the dollar's current weakness is notable, it does not imply an immediate or drastic loss of its status as the world’s primary reserve currency. The insights provided by UBS indicate that although the dollar is under pressure, the structural integrity of its reserve status is relatively secure for the foreseeable future.
Supporting this view, UBS highlights that as trade stagnates and potentially declines, the traditional importance of the dollar as a reserve currency diminishes significantly. In this context, investors are less likely to aggressively expand their holdings in dollar assets, shifting their focus elsewhere, albeit cautiously.
Where it sits in our coverage
Currently, our consensus target for EUR/USD is set at 1.075 with targets from various firms indicating a distinct spread. Notably, jpmorgan has set a target of 1.10 for March 26, while bofa anticipates a lower target of 1.04 for the same tenor.
This analysis aligns with jpmorgan's outlook, suggesting a stronger euro against the dollar. Conversely, it contrasts with bofa, indicating a divergence in expectations regarding the euro's trajectory against the dollar as we approach critical market junctures.
How other firms see it
The sentiment surrounding the dollar shows divisions among firms. jpmorgan and deutsche hold views that support a weaker dollar, while bofa stands in opposition, predicting a firmer demand for dollar assets, albeit at varying targets.
Related dynamics can be observed with pairs such as EUR/USD and USD/JPY, where market reactions to US economic indicators will significantly influence investor sentiment and risk appetite toward the dollar.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The dollar remains weak but is unlikely to lose reserve status dramatically.
- 02Concerns about the US's rule of law are contributing to decreasing international investor confidence.
- 03As global trade stagnates, the significance of the dollar's reserve status appears to diminish.
- 04International investors may curtail their acquisition of dollar-denominated assets.
Market implications
Watch for the upcoming price action in EUR/USD, as it could reveal critical shifts in market sentiment towards dollar assets in the wake of economic data releases. If bearish trends persist, a potential return to levels above 1.10 could indicate stronger euro support.
Risks to this view
Should there be an unforeseen catalyst, such as a marked improvement in US economic growth or a significant policy shift by the Federal Reserve, it could bolster the dollar’s appeal, reversing current bearish outlooks.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Tuesday 27th January. The US dollar has remained weaker without declining significantly further.
The rather frantic move higher in the precious metals prices might therefore owe more to fear of missing out than to a considered currency plan in this context. The dollar is very unlikely to lose reserve status overnight, it is however subject to a double hit over time. The dollar is losing market share as a reserve currency as the US's international position weakens and its domestic situation raises questions over things like rule of law.
Further the relevance of reserve status is likely to decline itself as trends towards localisation of production and the moderation of the hyper-globalised era have, to date, caused the stagnation of mercantile trade as a share of GDP and it may start to bring about its decline. The risk for the dollar is not therefore a dramatic exit with international investors flouncing out of US markets, but a gradual corrosion as international investors have less incentive to accumulate additional dollar holdings. US President Trump has again been posting on social media about tariffs, threatening to add another 25% to US consumers of goods from South Korea.
Markets reacted much as one would expect, affected stocks declining but then recovering ground with silence from administration officials damaging the credibility of the President's post. If responsible officials do not appear to be acting on the President's social media output, markets are increasingly inclined to just disregard the social media output. For the threats against US consumers of Korean goods, they now appear to be being filed alongside those against US buyers of goods from Canada and buyers of goods from countries that trade with Iran.
The UK-British Retail Consortium's shop price index rose quite sharply in January on the back of higher food prices. There was a rush to claim that this was due to UK government policies, but the BRC's own data frankly completely contradicts that. All shops are facing the same issues in terms of higher national insurance charges and other labour costs, and labour costs are the largest cost for any shop.
Yet, non-food retailers are seeing nothing like the price increases of food retailers. Of course, food retailers in the UK have had a long history of profit-led inflation, and it is not impossible that there is a strong desire on the part of some retailers to try and avoid the narrative that their increased profit margins are simply exploiting consumers' incomplete information about what is actually driving prices. The remaining data calendar is quiet.
There is consumer sentiment data in the United States. Given the polarisation of politics, the bias in the answers is likely to be quite extreme. Yesterday's Dallas Fed manufacturing sentiment survey again proved the violence of part of Zan's sentiment in its comments section.
The European Central Bank's Nagel is speaking on the digital euro. The digital euro already exists, of course, who uses cash these days, but the UCB likes to sound hip and trendy and down with the kids, so we get speeches like this from time to time. That's all for today, have a good day.
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