Pacific Investment Management Co. will take on less currency risk, predicting a limit to how far policy divergence can drive the dollar even as the greenback heads for its best weekly advance this year.
The Bloomberg Dollar Spot Indexhas climbed 1.2 percent this week as a chorus of Federal Reserve policy makers emphasized the central bank may raise interest rates as soon as April. The dollar should remain “broadly stable” versus the euro and yen, easing pressure on the People’s Bank of China as that translates into relative stability for the yuan against a basket of currencies, according to Pimco, which had $1.43 trillion of assets under management as of Dec. 31.
“We expect to have less currency risk in our portfolios, reflecting the repricing of the U.S. dollar over the past two years, and the limits to global policy divergence,” Joachim Fels, managing director and global economic adviser, and Andrew Balls, chief investment officer for global fixed income at Pimco, wrote in a report Wednesday. “We expect a gradual depreciation of the Chinese currency and the broader Asia currency basket.”
The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 major currencies, was little changed at 1,200.51 as of 6:49 a.m. New York time. It has climbed the most this week since the period ended Nov. 6.
The dollar advanced 0.2 percent to 112.64 yen and was little changed at $1.1171 per euro. Biggest gains came against currencies including the South African rand and South Korea’s won, rising 0.9 percent and 0.4 percent respectively. Crude oil fell 1.9 percent, extending Wednesday’s 4 percent slump, which was the most since Feb. 11.
St. Louis Fed President James Bullard said Wednesday policy makers should consider raising interest rates at their next meeting amid a broadly unchanged economic outlook and prospects of inflation and unemployment exceeding targets. He votes on policy this year. San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart made similar comments about the April gathering earlier this week.
Traders put the chances of a move in April at just 6 percent, according to futures data compiled by Bloomberg. The odds of a single 25-basis-point move by December were at 70 percent, climbing from 54 percent at the end of February. The calculation assumes the effective fed funds rate will average 0.625 percent after the Fed’s next increase.
“There is some scope for more dollar strength as the market priced out too many rate hikes,” said Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt. “The focus will more and more be on the possibility of an April hike. Fed action will be more important versus emerging markets.”
A Bloomberg gauge of 20 emerging-market currencies fell for a second day. The measure rose in February and March since dropping to a record low on Jan. 20.
The U.S. central bank will probably raise interest rates once or twice this year, according to the Pimco report. The Fed kept interest rates unchanged last week and halved projections for how many times it would increase in 2016, from four times projected in December, after volatility in financial markets and weakening global growth clouded the U.S. economic outlook.
The Pimco Total Return Fund, the world’s biggest actively managed bond fund, returned 0.9 percent this year, underperforming more than four-fifth of its peers.
The Bank of Japan and the European Central Bank are among central banks that look to be harboring “doubts about the efficacy of negative interest rates and are now adjusting their toolkit yet again,” according to the Pimco. The Group of 20 reaffirmed at their meeting in Shanghai last month that they will refrain from competitive devaluations, and agreed to consult closely on currencies.
“We see the currency war receding somewhat, with the recent G-20 statement, central bank rhetoric and actions suggesting that China will refrain from further sharp moves in its currency, a retreat from competitive currency devaluation efforts via negative deposit rates on the part of the BOJ and the ECB and instead a preference for QE and credit easing,” Fels and and Balls wrote.
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