Barclays: Dollar is the currency to own as funds pull out of emerging markets

Dollar is moving on 'Trump-flation' expectations: Barclays
Dollar is moving on 'Trump-flation' expectations: Barclays

The dollar stomped emerging market currencies down further on Friday, and that's not going to end anytime soon, analysts said.

The greenback has been on a tear since Donald Trump clinched a surprise victory in the U.S. presidential election. Hopes of an aggressive fiscal stimulus plan under the Trump administration has fuelled expectations of inflation and pushed up bond yields, boosting demand for the dollar.

"This is a dollar environment," Mitul Kotecha, head of Asia foreign-exchange and rates strategy at Barclays, told CNBC's "Street Signs" on Friday.

"It's difficult to argue against the dollar when you're going to see U.S. growth outperform as well, probably ultimately towards the end of next year," he said.

Kotecha expected the dollar index, which measures the greenback against a basket of currencies, would rise several percent more near term.

The jumped to as high as 101.32 in Asia trade on Friday, an at least five-year high, according to Reuters data. That's up from levels below 97 in the days leading up to Trump's win.

The dollar's strength is also set to continue to weigh on already hard-hit emerging market currencies, he said.

"We'll see further depreciation of emerging markets currencies, especially those that are really I guess susceptible to bond outflows. Those currencies are going to be hit by potential trade sanctions form the U.S.," Kotecha said. Trump's campaign rhetoric had promised a punitive approach to U.S. trade partners including China and Mexico.

"We don't know to what magnitude, to what extent what Trump will actually do. But the EM positive environment seems to be being dashed at the moment," Kotecha said.

To be sure, not everyone entirely agreed with expectations that the U.S. economy was set for a smooth ride under Trump management.

Taimur Baig, chief Asia economist at Deutsche Bank, said in a note this week: "We are not fully sold on the rising expectation of a goldilocks phase ahead for the U.S."

But some noted that expectations for further dollar strength were fairly widespread.

Nomura surveyed 182 clients earlier this week and found they expected the dollar index will climb another 5 percent over the next two months. The clients also expected the 10-year U.S. Treasury yield would approach 3 percent by next year, the Nomura note, dated Thursday, said.

NASA/Joel Kowsky | Getty Images

U.S. Treasurys sold off on bets Trump's plans to goose the economy through fiscal stimulus would increase the budget deficit and fan inflation. Bond prices move inversely to yields.

On Friday, the yield on the benchmark 10-year note rose as high as 2.3380 percent, up from levels below 1.8 percent in the days before the election.

That was the yield's highest level since early December of 2015, before the U.S. Federal Reserve hiked interest rates on December 16, 2015, for the first increase since 2006.

That 25 basis-point hike to a 0.25 percent to 0.5 percent range from a 0 percent to 0.25 percent range was followed by a long hiatus. But analysts widely expect the Fed will act again in December.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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