New Rate Expectations Will Boost Dollar: Strategist

The Japanese earthquake changed interest-rate expectations around the world and will boost the dollar as the yen loses its safe-haven status, according to Hans Redeker, the global head of foreign exchange strategy at BNP Paribas in London.


“Markets are reprising central bank policy expectations, selling out risk exposures, buying bonds and volatility,” Redeker told Tuesday.

“Safe-haven plays will gain traction, but with the Japanese yen weakening intervention risks increasing and (Japanese government bond) risk premiums potentially rising due to high debt levels, we doubt that the yen qualifies as a safe haven currency any longer,” he said.

Fitch now expects Japanese debt to hit 223 percent of gross domestic product (GDP) this year and is no longer ruling out a sovereign downgrade and expects selling pressure on currencies where expectations of rate hikes are easing, Redeker noted.

“Bear in mind that the (Federal Reserve) has been reluctant to signal early rate hikes," he said.

"Hence the US curve has little to price out unlike most other G-10 money market curves. This adjustment of global rate expectations will work in favor of the US dollar.”

The Aussie dollar is a "sell," given the commodity-rich economies exposure to the Japanese market, according to Redeker.

“Within a few days the Aussie dollar curve has moved from pricing in a rate hike to anticipating a rate cut,” he said. “Dovish RBA minutes released overnight will add to (Aussie dollar) selling pressure. The Aussie is a sell against the euro and the US dollar.”

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