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Sentiment towards the poor US dollar has gotten so extreme, that the last and only hope for it may be God.In a note, Citi’s Steven Englander looks at the prospects for recovery in the US, and sees more QE as an inevitability. And ultimately, just like the first two times, that QE will be negative and undermining for the dollar.
The only possible policy prescription that could cause the dollar to increase would be an earnings repatriation holiday.
And absent that, there’s not much other than, well…
The bottom line – most scenarios USD negative, except for HIA or deus ex machina recovery Investors have been selling dollars for three years to finance long positions in other assets.
Under ZIRP and the various QEs, returns to US assets are not attractive enough relative to foreign assets. When economic and financial conditions are poor, investors cut back their long risk positions and buy back their USD shorts and the USD rallies temporarily. If sentiment continues to be weak, most of the policy options available to US policymakers are USD-negative. The USD weakness may not manifest itself while markets are under acute pressure, but even limited good news for asset markets driven by policy activism would again be bad news for the USD. The USD positive scenarios are limited. HIA is the most likely USD plus, and we are likely to know within two months or so whether it is a real runner.
The other USD positive scenario is a self-generated recovery. We would not exclude the possibility that the economy is not as weak as asset markets and the Fed now anticipate, but recovery has to progress a long way before the USD becomes less vulnerable.