20180528-NATIXIS-Is_it_rational_to_be_buying_assets_in_dollars__8页_853kb

Flash Economics Summary

Core Content

The document discusses the recent appreciation of the US dollar against all currencies since the second quarter of 2018, focusing on the reasons behind this trend and whether it is rational for non-residents to continue purchasing dollar-denominated assets.

Main Points

1. Dollar Appreciation and Non-Resident Bond Purchases

• The dollar has appreciated significantly since March 2018.
• This appreciation is primarily attributed to non-resident purchases of US bonds, not equities or short-term assets.
• The net short-term position in the dollar is largely neutral.
• Non-resident equity purchases are minimal.

2. Central Bank Behavior

• Central banks (excluding the Federal Reserve) buy US bonds as part of their foreign-exchange reserve accumulation.
• This behavior is driven by the dollar's status as a reserve currency.
• However, the trend may slow due to:
  • The disappearance of China's trade surplus, which has historically fueled reserve accumulation.
  • The risk of capital outflows from other emerging countries, where foreign-exchange reserves are also being built.

3. Private Investor Behavior

• Private investors are concerned about currency risk due to the US external deficit.
• The expansionary fiscal policy at full employment is leading to a deterioration in the US trade balance, historically associated with dollar depreciation.
• The excess long-term interest rates in the US may not fully offset the risk of dollar depreciation in the long run.

4. Future Outlook

• The appreciation of the dollar is likely to be temporary.
• A reduction in non-resident bond purchases could lead to a reversal in the dollar's trend, resulting in depreciation.

Key Information

• Capital flows are the primary driver of the dollar's recent appreciation.
• Non-resident bond purchases are the most significant factor, not equity or short-term investments.
• Central banks are a key group buying US bonds, but their activity may decline.
• Private investors are attracted by interest rates but face currency risk.
• The US fiscal policy and trade deficit are expected to impact the dollar's long-term value negatively.

Conclusion

The appreciation of the dollar is likely to be temporary, driven mainly by non-resident bond purchases. As central banks reduce their reserve accumulation and private investors face currency risk, the dollar may experience a depreciation in the future. Therefore, the current trend should not be considered a long-term shift in the dollar's value.

Disclaimer

• The document is intended for professional and qualified investors.
• It is strictly confidential and cannot be disclosed to third parties without consent.
• It does not constitute a personalized investment recommendation.
• No liability is accepted by Natixis for the information or decisions based on it.
• Views and assumptions may change without notice.
• Regulatory and legal restrictions apply depending on the jurisdiction.

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Final Note

• The views expressed are the personal opinions of the authors.
• The report does not reflect the views of Natixis or its affiliates.
• No responsibility is accepted for the accuracy or completeness of the information provided.