BlackRock's Rieder says dollar decline to continue, reflects growing U.S. debt

Published Wed, Jul 29 202011:07 AM EDTUpdated Wed, Jul 29 20204:01 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Key Points

The dollar has surged nearly 4% this month, and it is responding to growing U.S. debt, according to BlackRock's Rick Rieder.
Rieder said he expects continued weakness in the currency, but not a sharp move lower.
The weaker dollar is a positive for risk assets, unless the currency move becomes more rapid and dramatic.

BlackRock's Rick Rieder said the dollar's decline is reflecting the ballooning U.S. budget deficit and growing debt, as Congress plans another $1 trillion-plus spending package to help the economy. "I think we're in a different regime around the dollar," said Rieder, chief investment officer of global fixed income, said in a telephone interview. He said the dollar has weakened particularly against the euro, amid the backdrop of uncertainty about the economy, the spread of the coronavirus in the U.S. and the amount of fiscal spending coming from Washington. Rieder said a debate is beginning to emerge about the level of debt the U.S. is taking on to fight the virus. The federal budget deficit was estimated to be a record $2.7 trillion for the first nine months of fiscal 2020, according to the Congressional Budget Office estimates. The Treasury has boosted issuance of new debt and is expected to increase it even more. The dollar index t his month has declined about 4%, currently the worst one-month loss since May 2010. It is at a two-year low after first surging in February and March to a more than three-year high in a safety trade, as the coronavirus spread to the U.S. The euro has gained 4.6% against the dollar in July. At the same time, gold h as raced higher to a record, with futures for August up 8.4% in July. The S & P 500 is up 3.8% in the month, while Treasury yields have crept lower. The 10-year yield was at 0.57% on Wednesday morning. Rieder said he expects Congress to ultimately agree to a fiscal package worth more than the $1 trillion put forth by Republicans this week. "My guess is the size of the package will be somewhat limited by the fact we're already seeing some pressure from the markets," he said. "The Treasury market is whistling like there's nothing in play around Treasury issuance." Rieder said the package is necessary to fight the deep unemployment and help the economy, but fiscal conservatives in Washington are likely watching the market moves with some concern. "My guess is behind the scenes in discussions there are those on the conservative side that are pointing out: 'Look what's happening in the dollar and look what's happening to gold. The market is telling you something,'" he said. "The conservative wing will say that's something to keep an eye on. In the near term, there's stress in the system in terms of people that need to get back to work." Rieder has been expecting Europe to outperform, and he expects to see the dollar weaken further, particularly against the euro and yen. The dollar has slid against the euro as Europe has dealt more successfully with the virus than the U.S. "I do think against the other major crosses, the dollar could continue be weaker," said Rieder, who is also head of the global allocation investment team in multi-asset strategies at BlackRock. "It's not going to be a shocked weakening, but I definitely could see the euro and yen improving against the dollar here." Rieder said Europe should do better because of its policy reaction and improved growth prospects. "Europe has better data on Covid. It's been a long time since we've seen Europe as the flight-to-quality trade," Rieder said. "It makes some sense. I don't think people are going to be fleeing from U.S. assets based on the fiscal package. People are certainly opening their eyes." The negative dollar trade so far is good for risk assets. "A very deliberate but moderately weakening dollar is almost nirvana for markets, particularly as you think about the global economy. Two-thirds of the world's trade transacts in dollars," he said. But if the move lower is too sharp, that could turn into a negative force. "If you saw the dollar move another 5 to 10 percentage points, that would certainly start to get concerning, particularly if it happens in rapid fashion," said Rieder. Rieder said he continues to move funds out of longer-duration Treasurys. "The Treasury market is holding in beautifully. I've reduced some duration we have in the portfolio. Real rates are extraordinarily low today," he said. Rieder said he expects to see the Fed increase its purchases of Treasurys. "In the last couple of weeks, I've been reducing some of our interest rate exposure, as the 10-year was going into the low 0.60s in yield. We still like the long end of the curve as the place where you can have some duration exposure." BlackRock, in its midyear outlook, said Treasurys no longer serve as the hedge they once did against stock market sell-offs. "The bid for safe assets in the world is like nothing we've ever seen before, almost regardless of price," Rieder said.

Rick Rieder

Katie Kramer | CNBC

BlackRock's Rick Rieder said the dollar's decline is reflecting the ballooning U.S. budget deficit and growing debt, as Congress plans another $1 trillion-plus spending package to help the economy.

"I think we're in a different regime around the dollar," said Rieder, chief investment officer of global fixed income, said in a telephone interview. He said the dollar has weakened particularly against the euro, amid the backdrop of uncertainty about the economy, the spread of the coronavirus in the U.S. and the amount of fiscal spending coming from Washington.

Rieder said a debate is beginning to emerge about the level of debt the U.S. is taking on to fight the virus. The federal budget deficit was estimated to be a record $2.7 trillion for the first nine months of fiscal 2020, according to the Congressional Budget Office estimates.