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USD STILL HAS SOME GAINING POWER

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USD STILL HAS SOME GAINING POWER

May 14 2015, 07.10am GMT

STOCK.com

According to a top Pimco investment manager, the recent pull-back seen by the U.S. dollar (USD) should be ignored as the dollar rally has not yet ended.

With a rate hike expected from the Federal Reserve as well as a strengthening U.S. economy ahead, the dollar bull run will pick up pace soon again, according to a chief investment officer at Pimco, Mihir Worah.

Speaking on Tuesday at the London Morningstar Investment Conference, Worah noted that the historical data on the greenback has shown that the USD typically moves over 3-4 year cycles and it then appreciates by around 20 to 25 percent.

Based on this, the latest appreciation of 15% we have seen over the past 12 to 18 months is evidently not finished. In fact, according to Worah, there is still another 5 to 10% appreciation still remaining in the greenback.

For the 1st time since 2003, in March 2015 the ICE dollar index (DXY) which measures the performance of the greenback against a basket of 6 other currencies, jumped above 100. However, after the release of negative U.S. data over the last few months, particularly the low March employment numbers, the index slid back to about 94.

In addition, the world-wide bond market’s recent shake-up has slightly weakened the dollar’s drive while at the same time; we have seen the euro (EUR) rally. Late on Tuesday this week, this trend continued when the dollar lost its grip when Treasury yields dropped, and the euro managed to creep above $1.12 while bond yields spiked in Europe.

But Worah cautioned investors - at least in the long term, this euro-dollar trend will likely not continue.

According to Worah, earlier this year, the EUR was trading at $1.05 and there is no reason that this level should not be reached again. While parity of the euro-dollar over the next 2 years is a big possibility, Worah stated that this parity within the next three months is most unlikely.

Considering the yen, Worah sees the dollar increasing to ¥125, from where it currently sits at around ¥119.80.

With an eye on the Federal Reserve’s policy, Worah did add a caveat to his predictions saying that if there is too much movement in the dollar then growth in the U.S. economy slows down and then the Fed doesn’t increase rates. He further said that “we are in a range,” however, from the current valuation one should see more appreciation, given that it’s not too rapid.

MT4 Chart: EUR/USD

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