The Mighty Dollar Is Due for a Comedown, PIMCO Says

After an eight-year run, Fed rate cuts and a slowing economy are seen as poised to weaken it.

The long ascendency of the US dollar is nearing a reversal, according to PIMCO.

The dollar, which has been on the upswing since 2011, will at last start to ebb, said Gene Frieda, a PIMCO strategist in London. The US currency’s strong run “is close to an end,” he said, pointing to slowing American economic growth and the Federal Reserve’s apparent plans to whittle interest rates.

The currencies of emerging markets and Japan are undervalued and could benefit from the dollar’s waning, he told Bloomberg TV.

The dollar has risen by 53% over the past five years, helped by an expanding US economy and, starting in late 2015, a Federal Reserve campaign to hike interest rates, which made US investments more attractive. The buck’s value, though, has flatlined this spring amid the Fed’s decision to suspend its rate increases.

And after the Fed’s policymaking meeting Wednesday, when it strongly hinted it would reduce short-term interest rates up ahead, US Dollar Index futures fell by 0.5% Thursday, and so did the spot price.

The dollar has an advantage over other denominations because it is the world’s reserve currency. The greenback is used for half of all cross-border transactions, and most commodities are valued in dollars. Dollars make up 61% of central banks’ currency reserves, which are used for transactions. Some nations, like Turkey, which has a lot of dollar-denominated debt, say the US currency’s high-flying status has harmed them.

What would happen if the dollar dropped? The large US trade deficit likely would narrow. Right now, US exporters operate at a disadvantage overseas, as their products are costlier than local goods and services. The Kyriba consulting firm estimates that the strong dollar knocked a nickel off average US earnings per share in last year’s final quarter.

For that reason, President Donald Trump wants to see a weaker dollar, on the theory that this would enhance American manufacturing and jobs when he runs for reelection next year.

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