Washington Insider-- Tuesday

Worried About Dollar Outlook

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

New WTO Chief Cautions China Cannot be Made to Feel Targeted

Chinese cooperation on trade reforms is most likely to come if it is not made to feel targeted by other countries, according to Ngozi Okonjo-Iweala, the director-general of the World Trade Organization.

Several countries have been pushing for reforms on industrial subsidies and state-owned enterprises used by China, with those countries saying the policies distort global trade.

"We also have to show China is not being targeted... When China feels it is being targeted, and it's only about China, you get a lot of resistance," Okonjo-Iweala told a European Commission conference. "The dealings I have had with China have been very constructive and I think that if we put the facts on the table about the negative spillovers from such industrial subsidies and share them with China ... they will be willing to look at that."

The WTO is working with the World Bank, International Monetary Fund and the Organization for Economic Co-Operation and Development (OCED) to "put some objective facts on the table," the WTO chief remarked.

This comes as the U.S. has continued to seek to build support with allies to take on China's actions on trade and economic policies.

Rise in Cost of Eating Out Now Seen Higher for 2021

The cost of eating out will be a little higher than previously forecast by USDA for 2021, but forecasts for overall food price inflation and grocery store prices were kept at prior marks by USDA's Economic Research Service (ERS).

Food away from home (restaurant) prices are now expected to increase from 2.5% to 3.5% in 2021 compared with 2020, ERS said, up from 2% to 3% forecast as the increase in March. The higher forecast was "driven by increases in prices for food from 'limited service' vendors (locations where customers pay at the register before eating)," ERS said.

Food prices overall so far in 2021 have shown increases compared with 2020, with restaurant prices up 3.7% in March from year ago while food at home (grocery store) prices are up 3.3% from year ago. So far in 2021, food at home prices are up 1% and food away from prices are up 2.3%, while the CPI for all food is up 1.6%.

Washington Insider: Worried About Dollar Outlook

Bloomberg is reporting this week that the most popular currency trade at the beginning of the year has splintered now as Wall Street takes to opposing sides on the outlook for the fate of the dollar in the world's pandemic recovery.

JPMorgan Asset Management and T. Rowe Price see the dollar weakening as U.S. economic exceptionalism wanes, while PineBridge Investments expects it to strengthen. Currencies from the euro to the Brazilian real – which suffered in the first quarter – have attempted rallies this month leaving the greenback sitting at a closely-watched technical crossroads.

"You have that idiosyncratic U.S. rates outperformance story being offset by the global cyclical upswing and by expensive valuations on the dollar," said Ian Samson, a multi-asset fund manager at Fidelity International in Hong Kong, who is long the currency against the euro. "We see significant crosswinds blowing the dollar in different directions."

While most on Wall Street called for a weaker dollar in January, the world's reserve currency went on a run that left speculative funds scrambling to cover some $30 billion of net short positions as Treasury yields climbed and expectations of rate hikes were brought forward. That trade soured this month, with the Bloomberg Dollar Spot Index slipping 2.3%. A break of the uptrend in place from its first quarter would point the way to further downside.

This week's policy assessment by the Federal Reserve, which has held firm against hawkish expectations, could lend weight to bears. At the crux of dollar forecasts is expectations for the pace of recovery in the world's biggest economy.

Credit Suisse Strategist Tantia discusses the outlook for Asian markets and why his firm changed their negative view on the U.S. dollar to neutral. As the world strives to break free from the bruising economic effect of coronavirus restrictions, the U.S. has inoculated more citizens than any other country, giving it an edge in the race to re-open. Coupled with the Biden administration's multi-trillion-dollar fiscal stimulus and a Fed that's allowing inflation to overshoot, it's spurring the likes of PineBridge Investments to predict more dollar gains.

"U.S. Treasury yields could see another leg higher once we see some inflation come back," with their premium over peers supporting the dollar, said Omar Slim, portfolio manager at PineBridge in Singapore. "Our view is that the dollar will retain a strengthening bias this year."

Ten-year U.S. yields surged more than 80 basis points this year to 1.77% in March, the highest since before the pandemic. While the benchmark stood at 1.58% Monday, it remains well above this year's low of around 0.90%.

"Positive U.S. data might very easily kick-start a dollar rally again," wrote Commerzbank AG currency strategist Thu Lan Nguyen in a note last week. "So for now U.S. dollar bears should make sure that they don't get excited too soon."

But not everyone is convinced the U.S. will continue outpacing peers. For JPMorgan Asset's Thushka Maharaj, its exceptionalism is set to fade as other nations catch-up on vaccine roll-outs and economic re-openings in the second half of the year.

The London-based strategist is keeping tabs on developed markets like Europe, the U.K. and Japan, and sees the euro outperforming the dollar in the medium term. “We are expecting the rebound in these economies to mirror what we are seeing in the U.S. right now,” she said.

Signs abound this trend is underway. Coronaviruses cases are rising in all regions except Europe, the World Health Organization said on Tuesday. The European Union is unleashing a new immunization drive to cover the bulk of its population within a few months, while on the economic front, recent PMI data have beaten expectations.

The euro has climbed about 3% from a four-month low in March and broke through the key $1.20 level last week. However, some favor other currencies to best the greenback. T. Rowe's Thomas Poullaouec sees more gains for Australia's risk-sensitive dollar as China's economy rebounds from the pandemic and demand for commodities rise.

Aberdeen Standard Investments' Edwin Gutierrez is watching for opportunities to boost exposure to riskier developing currencies as "the rest of the world catches up on the vaccine roll-out."

In the meantime, vocal bears continue to warn about long-term headwinds for the dollar. "Beyond the near term, we continue to see a structurally negative outlook for the U.S. currency," wrote Goldman Sachs Group Inc. strategists including Zach Pandl in a note Tuesday. "The dollar is still substantially overvalued."

Want to keep up with events in Washington and elsewhere throughout the day? See DTN Top Stories, our frequently updated summary of news developments of interest to producers. You can find DTN Top Stories in DTN Ag News, which is on the Main Menu on classic DTN products and on the News and Analysis Menu of DTN's Professional and Producer products. DTN Top Stories is also on the home page and news home page of online.dtn.com. Subscribers of MyDTN.com should check out the US Ag Policy, US Farm Bill and DTN Ag News sections on their News Homepage.

If you have questions for DTN Washington Insider, please email edit@dtn.com