ZYTrade Editors:  The dollar has sunk to levels not seen since 2018, partly due to both monetary and fiscal measures aimed at stemming the economic effects of COVID-19. This may be a lasting trend, though Wells Fargo sees a potential near-term bounce.

The dollar slides may intensify.

According to Wells Fargo Securities’ Michael Schumacher, the latest Federal Reserve decision on interest rates and its dovish stance supports the greenback’s weakening trend.

“The currency market has been very sensitive to this sort of thing while whereas the Treasury market just sits,” the firm’s head of macro strategy told CNBC’s “Trading Nation” on Wednesday. “The currency markets have been much more influenced, and we think that’ll remain the case for the next few weeks.”

Schumacher cites the massive monetary and fiscal stimulus designed to cushion the coronavirus’ impact on the economy as the main driver.

“The dollar could conceivably get a little bit of a bounce,” Schumacher said. “But if you look for, let’s say, a trade for the next four to five months, we think it’s dollar weakness.” 

The dollar index has been trading at its lowest levels since June 2018. Its decline has become a frequent topic on “Trading Nation.” In June, former Morgan Stanley Asia chairman Stephen Roach warned it would plunge 35% over the next two years and spark inflation.

However, Schumacher doubts the backdrop will spark further drops in the benchmark 10-year Treasury Note yield. He’s sticking by his base case that it will breakout.

 

‘I know it seems almost crazy’

“We’ve had this call for a while. [It] hasn’t worked out yet,” he said. “It’ll top 1% by the end of the year. I know it seems almost crazy.”

He believes the Fed will keep bond purchases at the current level. For the yields to stay low, Schumacher points out there needs to be more buyers.

“Who fills the gap? Do you really think foreign investors are going to rush in and buy U.S. assets with the dollar weakening? We are pretty skeptical about that,” Schumacher said. 

The 10-year yield has not traded above 1% since March. On Wednesday, it closed at 0.577%.

Originally posted on CNBC

 

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