Fixed Income Outlook  |  Q3 2019

Currency views

Fixed Income Team

Currency views

The dollar may waver

The Fed signaled in June that it may lower interest rates to sustain economic expansion. The end of the Fed's rate-hike cycle will alleviate some of the upward pressure on the U.S. dollar. The dollar's support from its high-yielding status is wavering. Still, growth outside the United States will need to pick up to allow a more broad-based dollar depreciation. Growth projections have bounced around this year, and the fallout from the trade rift between the United States and China has dampened the outlook. So, the dollar will likely remain supported against most other currencies except the Japanese yen and the Swiss franc.

Euro weakness could be capped

The outlook for the euro remains dominated by monetary policy, growth, and political risk premium. At its June meeting, the ECB held interest rates. ECB President Mario Draghi also signaled the bank could roll out fresh stimulus as soon as July. This would set the stage for a possible rate cut in September as policy makers step up their efforts to revive the eurozone economy. The euro will likely retain its role as a funding currency. But there are limits to how low the single currency can fall as other global central banks shift to a more dovish tone.

Rates continued to fall across the yield curve during Q2

Brexit weighs on pound

In the United Kingdom, Brexit has been delayed until the end of October. Prime Minister Theresa May announced her resignation in May, and the focus is currently on her successor. Boris Johnson and Jeremy Hunt are the leading contenders, and both candidates have increased calls for a no-deal Brexit. At the same time, renegotiating the Brexit deal by the end of October seems unlikely. The winning candidate may need to extend the deal or push for a no-deal plan, which could be overruled by the House of Commons. That might lead to a constitutional crisis. The Bank of England continues to highlight the need for rate hikes on a soft Brexit. The pound will be affected by swings in the U.S. dollar and by the uncertainty around Brexit.

Japan's yen could march higher

The Bank of Japan (BoJ) adopted forward guidance in April that pledges to keep current ultra-low rates at least until the spring of 2020. Given the dampened outlook for global growth and the potential for raising the value-added tax, the BoJ's monetary policy will remain accommodative. As central banks across the world begin to lower rates — or drop hints at additional easing — and markets price in cuts, interest-rate spreads with Japan have narrowed. This has reduced the search for higher yields abroad. Also, the risks to global growth and risky assets are tilted to the downside. We expect the yen to remain strong.


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The global economy has cooled in 2019 as the fallout from the ongoing trade rifts, waning business confidence, and financial market volatility have kept the lid on expansion.