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Pimco, one of the world’s biggest asset management firms, is betting that euro could drop to $1.20 over the next three to six months, shrugging off its recent rally.
Pimco’s position would have the dollar rising more than 10% from its current $1.3876 to the euro, which strengthened sharply Thursday on the ECB’s announcement of fresh liquidity measures to contain the euro zone’s debt crisis.
The ECB said it will cooperate with four other central banks including the Federal Reserve to provide banks with dollars over three funding operations. The latest measure came after funding stress continued to flare up in euro zone banks, raising fears the festering debt woes in the region could ignite a new financial crisis.
But the euro zone is confronting a toxic mix–how to put the fiscal houses of debt-ridden countries including Greece in order, while such measures could undermine an already weakening economic growth. A slew of measures–including bailouts for Greece, Ireland and Portugal–over the past year has failed to solve the debt crisis and the euro fell to a seven-month low of $1.3495 earlier this week.
The ECB’s latest move “is just another short-term fix,” said Scott Mather, head of global bond portfolio management at Pimco, in an interview. “The euro’s rally won’t last. The fair value for the euro should be around $1.20.”
The euro last tested $1.20 in June 2010 when the euro zone’s debt crisis started to flare up in Greece.
Mather maintains that the dollar will weaken in the longer term, but in the short term, he expects the euro to be “a bigger loser.”
“The market has finally seen the problems of monetary union without greater economic, political, and fiscal union,” said Mather. “European monetary union will need to move in that direction or move to the other end of the spectrum and contemplate exits and defaults by some member countries.”
“There is no smooth path to solve the problems,’ he added.
Worries about the euro zone’s debt problems have added to investors’ existing worries about the global economic outlook. Reflecting these concerns, Mather fine-tuned his outlook for the dollar against emerging-market currencies.
Mather expects many emerging-market currencies, which rallied earlier this year against the dollar but have weakened in recent weeks, to decline more in the near term with the Turkish lira and the Hungarian forint the most vulnerable.
“The dollar’s outlook is still bearish in the longer term but over the next few months, it will outperform many emerging-market currencies due to flight to safety demand,” said Mather, adding that U.S. investors may cut holdings of foreign assets and repatriate money home, which would support the dollar.
One currency to buck the trend will be the Chinese yuan as policymakers in the world’s second largest economy will continue to allow the currency to gain in value to help tame inflation, said Mather.
“The yuan is my favorite currency to buy,” he said. “My base case is for a 5%-7% annualized rise in the yuan versus the dollar in a slowing economy environment and the pace of appreciation will be bigger if the global economic outlook improves.”
Some investors expect a smaller pace of gain in the yuan due to the uncertainty about the global economy, which would hurt China’s exports. Some have argued that China may put a brake on the yuan’s rise should the U.S. be hit by a recession.
Reflecting his preference for the yuan, Mather said he has increased the holdings of the yuan in a basket of currencies while cutting exposure to the Mexican peso and the Brazil real.
Over the past three months, the dollar has lost 1.36% against the yuan. In contrast, the U.S. currency has gained 9.8% and 8.7% respectively versus the peso and the real over the same period.
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Pimco has been doing great lately with the bet agaisnt the US terasury …
The warning signs are everywhere.
Every country is facing growing inflation.
Your money does not go nearly as far today as it once did.
What to do?
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It’s helped me prepare for our
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Free Video here-
“How to Profit like the Ultra-Rich in Times of Economic Chaos”
http://theelevationgroup.net/presentation/register.php?a_aid=160667&a_bid=290b868b&chan=y
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MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. MarketBeat lead writer Mark Gongloff spearheads the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com or write Mark at mark.gongloff@wsj.com.
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