NEW YORK, Nov 23 (Reuters) - Investors expect the dollar to continue to weaken in 2021, boosting prices of a wide range of assets from U.S. stocks to emerging markets and industrial metals.
The dollar has fallen 6 percent since the start of the year against a basket of major currencies on the back of record low U.S. interest rates, massive fiscal stimulus and growing demand for riskier assets, and this year is likely to be its biggest year of decline since 2005.
According to a recent Reuters survey, two-thirds of analysts expect the dollar to remain weak until at least the middle of next year. This is because they believe that investors will continue to seek higher yields by moving their money into relatively riskier assets.
Michael Purves, CEO of Torbakken Capital Advisors, wrote in a note to clients, "The case for a weaker dollar is made.
A weaker dollar is a tailwind for U.S. exporters and also boosts profits when U.S. companies with international operations convert their overseas earnings into dollars.
BofA Global Research estimates that for every 10 percent decline in the dollar, the profits of the companies that make up the S&P 500 Index increase by about 3 percent.
The S&P 500 tends to rise an average of more than 22% in the years following a 0% to 3% decline in the weighted average of the dollar's value against the currencies of a wide range of major trading partners, according to a study by Bespoke Investment Group.
The index is down just over 1.3 percent this year, so "the outlook is extremely positive for equity investors in '21," Bespoke analysts wrote this month.
Nevertheless, a gradual decline in the dollar may be preferable to a sharp drop.
North American companies suffered a negative impact of $14.16 billion from currency fluctuations in the second quarter of this year, according to financial management firm Kiriba.
A weaker dollar also tends to push up resource prices. International resource prices are denominated in dollars, so a weaker dollar makes it easier for foreign investors to buy.
Jeroen Blokland of Robeco, an asset management firm, said, "A weak dollar is doubly supportive for commodities. Most commodities are denominated in dollars, and a weaker dollar tends to coincide with periods of higher economic growth (in the U.S. and elsewhere)," he said.
The S&P/Goldman Sachs Commodity Index has surged about 74 percent since the end of April as a wide range of components, including oil and gold, have risen.
According to Sanos Badass of Neuberger Berman, in the bond market, it is standard practice to buy inflation-sensitive assets such as US inflation index-linked bonds (TIPS) when the dollar weakens.
In general, inflation tends to rise when the purchasing power of the currency decreases.
A weaker dollar is also a tailwind for emerging markets. The MSCI Emerging Markets Index has risen 13% since the beginning of the year.
However, few market participants believe that the dollar will decline in a straight line. According to analysts, the dollar could rise if the Federal Reserve shows signs of tightening monetary policy sooner than expected.
The dollar also tends to rise when market uncertainty increases and investors seek safe-haven assets. Such a move was seen this week when concerns over the spread of a new coronavirus variant increased. John Hardy of Saxo Bank wrote that these developments "highlight that the dollar remains the 'safest of all safe assets' when the appetite for risk dries up.