The worsening of China's economic outlook may lead to demand for the world's safest assets, of which the dollar is likely to be the top beneficiary.
That is according to strategists who reckon investors could double down on long bets against the yuan and other emerging currencies as jitters around the Chinese downturn spur funds to dial back on risk.
After China s central bank eased policy, the dollar bulls gained Monday after the central bank unexpectedly eased policy, triggering a rush back to the world's reserve currency after a recent weakness and leaving virtually every developing peer falling in its wake.
Stephen Miller, an investment consultant at GSFM, said the dollar is the place to be as the fallout continues. There is good reason to believe that more flows into the dollar and US assets will be seen as China's woes deepen. The Bloomberg Dollar Spot Index rose for the second straight session on Monday as investors sold everything from the Chinese yuan to the Australian dollar for the haven greenback. The US currency is still stronger against every Group-of- 10 peer this year, even though the gauge is down 3% from an all-time high in July.
Brown Brothers Harriman Co. said in a note that they maintain their strong dollar call. The dollar should still benefit from the strong US economic outlook after the risk-off period ends. China's offshore currency fell by as much as 0.8% after a slew of disappointing economic data. Its decline dragged all Asian peers lower, with the Thai baht and Indonesian rupiah among the biggest losers.
If Chinese slowdown risks materializes, we expect it to lead to a softening of Asian currencies such as the won and rupiah, said Chang Wei Liang, strategist at DBS Bank Ltd. Asian economies are dependent on Chinese demand and are at risk of facing slower export growth. King Dollar Upends the Global Economy With No End In Sight
Some people are betting on a stronger dollar, but not everyone is betting on it. The best days of the year may be over, and hedge funds turned bearish on the US currency for the first time in a year.
Mizuho Bank Ltd. suggested that the Federal Reserve's policy tightening cycle may end soon, a reason for investors to be pessimistic.
Others warned that calls for a peak in dollar strength may come back to bite.
As global growth slows, the single bright spot in China's economy is exports, but this will come under pressure, said Alvin Tan, strategist at RBC Capital Markets in Singapore. You can't write off dollar strength in the midst of a global growth slowdown.