Treasury Secretary-designate Janet Yellen is expected to declare that the authorities won’t seek a weaker US dollar to boost exports in her testimony on Tuesday. AP
Treasury Secretary-designate Janet Yellen is expected to declare that the authorities won’t seek a weaker US dollar to boost exports in her testimony on Tuesday. AP
Treasury Secretary-designate Janet Yellen is expected to declare that the authorities won’t seek a weaker US dollar to boost exports in her testimony on Tuesday. AP
Treasury Secretary-designate Janet Yellen is expected to declare that the authorities won’t seek a weaker US dollar to boost exports in her testimony on Tuesday. AP

Economy

Hedge funds bet on weakening US dollar throughout 2021

High dollar valuations, low nominal and real rates and a rapid recovery in the global economy will weigh on the greenback

Bloomberg

January 18, 2021

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The dollar’s downtrend may be set to resume.

Hedge funds boosted net short positions in the greenback to their highest level since April 2018 in the week through to January 12, according to data aggregated from the Commodity Futures Trading Commission. They also raised net bullish bets on the pound to the most since October and wagered on the euro and the Australian and New Zealand currencies to rise.

The bets come as the world’s reserve currency enjoys a reprieve from a two-year slide after US yields climbed to a 10-month high. A renewed bout of weakness in the dollar may amplify scrutiny of the incoming US administration’s policy, with Treasury Secretary-designate Janet Yellen expected to declare that the authorities won’t seek a weaker currency to boost exports in her testimony on Tuesday.

“The dollar is still likely to move lower over the course of the year,” Seamus Mac Gorain, head of global rates at JPMorgan Asset Management, said last week. “Many of the currencies which are more levered to global growth, particularly emerging market currencies” and the Aussie are set to strengthen, he said.

The Bloomberg Dollar Spot Index has climbed more than 1 per cent since sliding to the lowest in almost three years this month. While the gains have fuelled talk about a rebound, some including Goldman Sachs and investors in a Bank of America survey remain steadfast in forecasting a weaker greenback.

“We continue to believe that the combination of high dollar valuations, low nominal and real rates, and a rapid recovery in the global economy will weigh on the greenback throughout 2021,” Goldman strategists wrote in a January 17 note.

Ms Yellen is expected to affirm the US's commitment to a market-determined dollar value and give assurances that it won't seek a weaker dollar for competitive trade advantage, The Wall Street Journal reported, citing President-elect Joe Biden transition officials familiar with her preparation for her confirmation hearing.

The US adopted a policy of favouring a “strong” dollar in 1995. While the mantra did evolve from one Treasury chief to another, no administration from then until the Trump years communicated, as the president did in 2017, that the dollar was “getting too strong”.

“This is not the same as the strong-dollar policy of the past,” Khoon Goh, head of Asia research at ANZ Bank, said of Ms Yellen’s expected upcoming remarks. “A commitment to market-determined exchange rates implies that the new administration will be comfortable with further dollar weakness.”

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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