U.S. growth, deficits to push dollar lower, real yields to support

(Reuters) – The U.S. dollar is expected to continue declining, pressured by rising trade and fiscal deficits along with recovering growth that is being powered by a rise in commodities prices, a fund manager and two economists said.

However, a rise in real yields in the United States backed by a strong recovery in the economy will keep the dollar from falling drastically, Binay Chandgothia, managing director and portfolio manager at Principal Global Investors in Singapore, told the Reuters Global Markets Forum on Wednesday.

“My sense is that the dollar weakens a tad more, (by about) 2%-5%, from here,” said Chandgothia, whose firm manages nearly $545 billion in assets.

He added that the dollar could get a lift from the U.S. Federal Reserve changing its stance as this will start pushing up real yields at the short-to-medium end.

The Fed is likely to stay on course despite growing momentum in the U.S. economy in its policy statement due at 2 p.m. EDT (1800 GMT) on Wednesday.

Robert Carnell, chief economist and head of research at ING Asia in Hong Kong, said he expected the Fed taper to likely come at a time when U.S. inflation will be dipping and prices in Europe will be picking up.

“And this makes timing any currency direction very hard.”

Peter Cardillo, chief market economist at Spartan Capital in New York, said he expected the dollar index to break below the 90-level “convincingly,” on the back of U.S. deficit spending, President Joe Biden’s infrastructure bill and government spending on entitlement programmes.

“I feel (the dollar index) would trade around 83.50 by December 2021,” Cardillo said.

The dollar index has fallen 2.6% from its 2021 high hit on March 31, and is now trading at 91.004.

Carnell said he wasn’t worried about inflation spiralling out of control, and that central banks in developed economies had been waiting for these price increases to show up.

“Though ultimately, it does argue against maintaining emergency stimulus measures,” he added.

ING Asia expects the euro to trade at 1.28 against the dollar by year-end, but Carnell said there were many factors that could undermine that call.

“The timing of a broader global recovery is one, (and the others are) the timing of the taper from both the European Central Bank and the Fed,” Carnell said.

The euro has risen 3.1% against the dollar from its March 31 low, and is now trading at $1.2066.

Both Carnell and Cardillo expect the U.S. 10-year bond yield to rise to around 2.25% by the end of 2021.

The benchmark 10-year yield is currently at 1.6378%, down from 1.776% on March 30, but has risen from its 2021 low of 0.906% hit on January 4.

(These interviews were conducted in the Reuters Global Markets Forum, a chat room hosted on the Refinitiv Messenger platform. Sign up here to join GMF: refini.tv/33uoFoQ)