outlook on dollar puzzle

Extract from our "Reaffirming Our Constructive Outlook for the Dollar" research paper, published on the 28th March, 2014. Register for a free trial* to access the full paper.

We believe that the dollar weakness seen in the last two months will likely prove to be temporary, and expect the dollar to appreciate this year, against a broad range of currencies. In this note, we take a step back to critically re-examine our thesis on the dollar by (i) updating our currency valuation calculations and (ii) thinking through the likely scenarios for bonds and equities for 2014. We conclude that the dollar still looks cheap on our measures, and for US bonds and equities, we will likely see much lower real excess returns on the SnP this year, compared to the previous five years. A repeat of what happened in 1979 (when equities generated a modest return while bonds experienced a small loss) or 2000 (when equities sold off sharply while bonds rallied) are two scenarios we see as more probable than alternative scenarios, e.g., such as that both bonds and equities rally simultaneously or sell-off simultaneously. In both of the ‘1979’ or ‘2000’ scenarios, we think the dollar should perform well, for different reasons.

The full report contains the following sections:

  • Our positive outlook for the dollar
  • Valuation
  • How will equities and bonds perform?
  • How should the dollar perform in the various scenarios?
  • How could the disappointing performance of the dollar so far this year be explained?
  • Bottom line

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    This communication is issued by Eurizon SLJ Capital Limited (“ESLJ”), a private limited company registered in England (company number: 09775525) having its registered office at 90 Queen Street, London EC4N 1SA, United Kingdom. ESLJ is authorised and regulated by the Financial Conduct Authority (FRN: 736926). This communication is treated as a marketing communication intended for professional investors only and is provided only for information purposes. It has not been prepared in accordance with legal and regulatory requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. It does not constitute research on investment matters and should not be construed as containing any recommendation, advice or suggestion, implicit or explicit, with respect to any investment strategy or financial instruments, or the issuers of any financial instruments, or a solicitation, offer or financial promotion relating to any securities or investments. ESLJ and its affiliates do not assume any liability whatsoever for the contents of this communication, save to the extent agreed in any written contract entered into between ESLJ and the recipient, and do not make any representation or warranty as to the accuracy or completeness of any information contained in this communication. Views are accurate as at the time of publication. Opinions expressed by individuals are their own and do not necessarily reflect those of ESLJ or any of its affiliates. The value of any investment may change and an investor may not get back the original amount invested. Past performance is not an indicator of future performance. This communication may not be reproduced, redistributed or copied in whole or in part for any purpose. It may not be distributed in any jurisdiction where its distribution may be restricted by law and persons into whose possession this communication comes should inform themselves about, and observe, any such restrictions.