Fixed Income Outlook  |  Q2 2020

Currency views

Putnam Investments

Currency views

The dollar may trend higher

The dollar's support from its high-yielding status has dropped precipitously. The currency's appreciation will depend on the fallout from the coronavirus and the measures put in place to counter them. The dollar is expected to remain strong against other currencies unless the COVID-19 pandemic starts to dissipate.

Euro decline reflects sentiment

The outlook for the euro remains dominated by monetary policy, growth, and political risk premiums. The European Central Bank (ECB) kept rates unchanged but expanded its asset purchases to include a new €750 billion bond-buying program. The euro could appreciate if there is a rebound in risk sentiment and the LIBOR-OIS spreads normalize in the coming weeks.

Pound outlook depends on risk appetite

The British pound is no longer the idiosyncratic story driven by Brexit and the ongoing negotiations on future trade relationship between the United Kingdom and the European Union. It is now at the mercy of global risk appetite and economic growth.

Yen likely to remain supported

The Bank of Japan (BoJ) has limited room to cut rates. The central bank held rates steady and pledged to buy exchange-traded funds (ETF) at an annual pace of around 12 trillion yen, which is double the previous amount. As the BoJ holds short-term rates steady, the yen's moves will be subject to the outlook for global growth and risk appetite. We believe the yen will likely trend higher.

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An extremely sharp global downturn is unfolding as the coronavirus pandemic takes a toll on economic activity and sentiment.