Dollar to remain firm - BBH
Analysts at Brown Brothers Harriman explained their broad outlook for the dollar remains intact.
Key Quotes:
"It is predicated on the divergence of monetary policy and interest rates. The traditional knock on the US, that having the dollar as the major reserve currency gives it an exorbitant privilege of lower interest rates, misses this key driver. The US premium over Germany, the UK, and Japan are at multi-year extremes. This creates an incentive structure that encourages investment flows into the US and hedging non-dollar exposure.
On top of the monetary divergence, which, in our conception, is sufficiently encompassing to include the health of financial institutions, is the policy mix. A trajectory of tighter monetary policy and looser fiscal policy is associated with currency appreciation. This was the policy mix under Reagan-Volcker and in Germany when the Berlin Wall fell, and the country was reunited.
Also, we are concerned that political events, not just what we outlined above but those continuing over the next few years, are going to challenge the foundation of the European project. In the not-too-distant future, investors are going to have to contemplate a post-Merkel Germany and a post-Draghi ECB. To be sure, these developments are not imminent, but for long-term investors, the European outlook is particularly concerning."