The U.S. dollar index could fall to as low as 85 as the Federal Reserve grows its balance sheet again by purchasing more bond assets, a Citi strategist said Thursday.
“Our latest projections are that it would weaken even further — maybe to the high 80s, perhaps even as low as 85,” Mohammed Apabhai, head of Asia Pacific trading strategies group at Citi, told CNBC’s “Street Signs.” Technical analyst Daryl Guppy said last year that 85 is a “historical support level” for the dollar.
The dollar index is a measure of the greenback’s value relative to a basket of currencies, largely made up of the United States’ most significant trading partners.
The Fed increases its balance sheet by buying up bonds and Treasurys as a way of pumping cash into the market. That in turn makes bond yields — which move inversely to prices — drop as the bond prices rise. The dollar usually weakens when bond yields fall.
“We’re basically saying that the Fed is probably going to be the most dovish of all the central banks, regardless of the fact that … they’ve put rates on pause,” he said. The U.S. central bank on Wednesday cut interest rates for the third time this year, but signaled that a pause was ahead.
That’s because the Fed’s balance sheet has expanded quickly, by more than $205 billion since the beginning of September, Apabhai explained. In comparison, an increase of that size would take the European Central Bank more than a year to complete, he said.
“For us, the fact that the Fed has gone into pause mode is not really as significant as the fact that the balance sheet of the Fed is going to expand,” he said. “We’re basically looking at substantially weaker levels on the dollar.”
If the dollar index were to weaken to 85, the euro could strengthen to 1.21 against the greenback, Apabhai predicted. “That’s … going to be very positive for emerging market equities.”
‘Bullish picture’ for Hong Kong
“We’re actually calling for a switch from European equities, which have outperformed this year, … into emerging markets right now. In particular, into the Hang Seng Index,” Apabhai said.
Capital could flow to the Hong Kong market if the dollar weakens, he said.
“From a bottoms-up perspective, there’s a lot of stocks that are looking very attractive,” he said. “You want to basically buy them and lock them away for your children … the dividend yields are very good.”
“Certainly, we think that there’s potentially 40% upside over the next few years,” he added.
Hong Kong has faced months of violent protests following the proposal of a controversial extradition bill that has since been withdrawn.
“The property sector is deeply discounted. Some of the large retail … names have had their largest falls since the global financial crisis,” Apabhai said.
However, he noted that investors, including long-term holders and macro funds, appear to be returning to the market.
“So, actually quite a bullish picture that is starting to build up for Hong Kong, notwithstanding all the recent events that have been happening over here,” he concluded.