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Both the dollar and yields will keep climbing, at least for short term

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The dollar still has room to climb, looking particularly strong in the short-term — and this will deliver another hit to emerging markets, currency expert Simon Derrick told CNBC on Thursday.

“In the short term, I think the dollar probably would be a stronger rather than a weaker currency,” Derrick, who serves as chief currency strategist at BNY Mellon, said on “Squawk Box Europe.”

This is despite current global trade tensions, although he warned that if ongoing tariff action undermined the market’s faith in America’s economy in the long term, it could be “a very different picture.”

Developments over the previous 24 hours were “fascinating” for the U.S. currency, Derrick said. The euro had hit a 10-day high against the greenback on Wednesday following comments by European Central Bank (ECB) Chief Economist Peter Praet that the bank would shortly debate ending its decade-long program of bond buying by 2018’s close.

Why does that matter to the dollar?

“It means there may be less investors searching for yields in the U.S., which in turn should push yields higher,” Derrick said, referring to U.S. Treasury bonds. The yield on the benchmark U.S. 10-year bond pushed to 2.994 on Thursday, a nearly two-week high. Yields move inversely to bond prices.

And this will leave its mark on emerging economies, the strategist warned — particularly those who are exposed to high amounts of dollar-denominated debt, who will be finding it more expensive to borrow money.

“It’s going to play out in the yen, in Turkey, Brazil, Mexico — those are the currencies that are going to suffer in the same way they did a few weeks ago,” Derrick said.

Emerging market assets saw a rout in the past month following the dollar’s rally of some 6 percent since mid-April on the back of strong U.S. jobs and wages data and a brusque policy tightening outlook for the Federal Reserve.

“I think we’re going to see a lot more pressure coming onto emerging market currencies once again and the market isn’t focused on it yet,” Derrick said.

Plenty of economists are less bullish on the buck’s sustained strength. In a Reuters poll conducted over the first week of June, more than half of analysts polled — 35 out of 60 — believed the dollar’s resurgence would last for just another three months. Ten of the analysts saw it ending within one month, while a further 15 forecast a six-month growth stretch.

Depending on what one would characterize as “short term,” Derrick’s forecast could fall into any one of those bets.

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June 7, 2018

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