The U.S. dollar “is set to decline further” as the Federal Reserve keeps interest rates very low for years, with policy responses now favouring the euro, money managers at PIMCO said on Tuesday.
PIMCO’s Gene Frieda, Global Strategist, and Sachin Gupta, Head of Global Portfolio Management Desk, noted that in previous depreciation cycles the real trade-weighted dollar had fallen some 15% to 20% relative to current levels, but that even then “the dollar would still only be marginally undervalued based on our estimates.”
The dollar on Tuesday hit a new 28-month low =USD and the euro approached $1.20 for the first time since 2018.
The U.S. currency’s previous interest rate advantage over rivals has disappeared as the Fed embarked on aggressive policy stimulus, and the PIMCO managers said a huge new recovery fund in the European Union had increased the euro’s attractiveness as an alternative to the greenback.
“We believe that Fed policy will remain accommodative for as long as it takes to bring inflation back to target, “on average,” Frieda and Gupta said in a statement.
“Given our expectation that full employment does not return before mid-2024, this would set the Fed on course for a multi-year period of very low policy rates and asset purchases,” they said, while adding that ongoing uncertainty about the coronavirus pandemic would limit the dollar’s decline.
The Newport Beach, California-based Pacific Investment Management Co (PIMCO) had $1.92 trillion in assets under management at end-June. (Reuters)
