At a time when most commentators are fixated on the continued depreciation of the dollar, the Heartwood investment director predicts “US dollar strength and sterling weakness may be a feature of the landscape in the not too distant future”.
During 2017 thus far, the dollar has been exceptionally weak. Currently, the greenback is trading at a one-month low against both the yen and the euro.
And even next to a historically weaker pound, the dollar still appears feeble, and did even more so on Monday as the pound climbed to $1.3177 against the American currency.
Recently, there have been a number of factors weighing heavily upon the dollar, from dovish sentiment out of the Federal Reserve to underwhelming economic data and waning enthusiasm for all things Trump trade.
In spite of these three major headwinds, Bishop believes this period of dollar weakness won’t last on the basis that each challenge can be ameliorated.
So far this year US data has been lacklustre relative to other developed markets, the eurozone in particular, and “given that foreign exchange rates are relative prices, such comparisons take on a greater significance than in other asset classes,” said Bishop.
However, “non-US economic data is unlikely to surprise on the upside indefinitely, so the US may see some cyclical outperformance in due course”.
Similarly, although the Trump trade has been dampened by the administration’s unprecedented knack for scandal and generating negative headlines, “even the faint whispers” of tax reform could prompt a dollar rally, Bishop believes.
Finally, as the Federal Reserve leads the way for central banks’ transition from quantitative easing to quantitative tightening, Bishop anticipates this will trigger higher US treasury yields, which could provide another boost to the dollar.