(Bloomberg) -- Forecasters anticipating a weaker dollar this year will again get it wrong, thanks to the enduring appeal of American interest rates that are higher than those abroad, according to David Bloom at HSBC Holdings Plc (LON:HSBA).
“Everyone’s convinced themselves the dollar’s going to be weaker,” Bloom, HSBC’s global head of foreign-exchange strategy, said in an interview with Bloomberg TV. “It’s the third year in a row they’re going to fail. They got egg on their face last year, they got egg on their face the year before and now they’re going for the triple egg.”
U.S. two-year Treasury yields are about 1.56%, compared with negative rates on equivalent securities in Japan and the euro zone. That’s also higher than found in Australia and New Zealand, developed nations that until recent years long had premiums over the U.S. It’s even more than South Korea, considered an emerging market.
“This is what’s happening everywhere -- if you start offering me less than the mighty dollar offers me, your currency’s going down,” Bloom said when asked about New Zealand.
Bad Hotel
One exception is the pound, which -- while U.K. rates are also below those in the U.S. -- is set to benefit from Britain’s newly stable government, according to Bloom. Last month’s election generated a large majority for the Conservative party, ending the hung parliament that had prevailed since 2017.
“The one currency we are very bullish against the dollar is sterling,” Bloom said. “The political risk was very negative for sterling, so we’ve taken one negative factor and we’ve chucked it away. That’s got to be good for the currency.”
The veteran currency analyst likened the greenback to a bad hotel, which guests want to leave from, but keep checking back into given how much worse things are elsewhere. “When you’re looking for an alternative to that bad hotel, there’s one across the road. It’s called sterling. And we think it’s great.”
While the dollar gained against the euro in 2019, it was weaker against the pound and the Canadian dollar.
Bloom also projected a retreat for emerging-market currencies, which have been climbing since September as U.S.-China trade tensions eased.
“Once those yields start compressing” even further than they have done already, “you’ve got kind of developed market yields but emerging-market risks,” Bloom said. “After we see the great rally in EM and the race to the bottom of interest rates we could see at some point later this year, or maybe it’s next year, you could see suddenly your yields are just too low for the risks involved.”