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U.S. dollar ‘poised to stabilize with increasing downward pressures,’ strategist says

Global X Head of Investment Strategy for Europe Morgane Delledonne joins Yahoo Finance Live to discuss the outlook for the U.S. dollar, the rate differential as global central banks raise interest rates, and economic sentiment in Europe and Japan.

Video Transcript


AKIKO FUJITA: We're going to stay with the dollar. Our next guest says she believes the greenback is poised to stabilize amid more aggressive ECB and BoE hiking paths toward the end of the year. It comes amid growing evidence that Fed tightening has started to weigh on the US economy fueling expectations the central bank will temper the pace of its rate hikes.

Joining us in studio, we've got Morgane Delledonne. She's Global X ETFs head of investment strategy for Europe. Morgane, good to talk to you today and certainly fitting when we've started to see a bit of a pullback in the dollar. I was thinking back to even a month ago where we had guests on who were saying it's going to remain high for a very long time. It feels like we made a pivot pretty quickly.

- Absolutely. I think we are in a turning point. When you look at the rate differential going forward and looking at the paths the ECB and the Bank of England are taking as an aggressive-- at least as aggressive as the Fed or even more-- in the near term, the rate differential won't lead to stronger dollar. Then you look at the US economy starting to feel that higher interest rates and probably going to a soft landing scenario. So overall, from an economic standpoint, interest rate standpoint, it seems that the dollar is poised to stabilize with increasing downward pressures.

AKIKO FUJITA: What's the expectation on your end on how exactly the Fed moves next? I mean, yes, to your point, there's been, sort of, slowly this expectation building in about the Fed maybe at least pausing or slowing those rate hikes, but we've got another meeting just around the corner. What are you anticipating then?

MORGANE DELLEDONNE: I think it's really too early to say that the Fed is going to pose on its rate hikes. I do think that the main input for the Fed's decision to continue to prescribe 75 basis points is coming from inflation data. And I do see a case that the Fed continues at this pace until it sees a real inflection point in the CPI numbers, which is not yet materialized. So I do think the Fed is going to continue to hike 75 basis points next week and potentially in December. But then we'll be not far off the 5% mark, which is probably very close to the peak for the Feds fund rate this cycle.

AKIKO FUJITA: The Fed has really been leading the way in terms of how quickly they move, how aggressively they move when you look at major central banks around the world. You mentioned the ECB, the BoE, of course, the Bank of Japan. In Europe though, we've already seen a pullback.

And the expectation seems to be going into the winter things could get even worse when you think about where energy prices are going. How aggressively do you think the ECB, for example, will need to move as a result of that? Because they have been moving just a little step behind the Fed.

MORGANE DELLEDONNE: I think we have already passed the peak pessimism across Europe. I think now the economic outlook is becoming more stabilized, which also will help stabilizing the euro-dollar currency pair. I think when you look at the reserves in terms of energy, we are 88% full. We have very little leverage left on Russia in terms of gas imports. It's about 9% now of what we consume.

You also look at the economic data, they haven't reflected a massive downturn. They are looking at some softness, but nothing that is critical. So looking ahead with all this fiscal stimulus coming in continental Europe and it really gives the ECB the power to step up in terms of interest rate hikes. And bearing in mind that they are starting from a much lower base than the Fed, so playing catch up there, I think.

AKIKO FUJITA: Finally, really quickly, I know you're focused on Europe, but the Bank of Japan increasingly in focus here. We've seen two interventions, as far as we, in terms of the currency markets. You've got the governor there Kuroda stepping down in April. And yet there's still questions about whether, in fact, they're going to pull back on this yield curve control given where rates have moved. How big of a risk-- when you look at from the European perspective, how big of a risk does what's happening over in Japan pose?

MORGANE DELLEDONNE: I think so far, the Bank of Japan has kept its accommodative stance despite all the central banks increasing, so I don't think there will be a massive U-turn in Japan. And I think, if you look towards the end of the year, the risk of having a more hawkish stance from the Fed, Bank of England, and ECB has reduced dramatically, which will help potentially reduce the risk of Bank of Japan having a surprising move in the coming months.

AKIKO FUJITA: Cushions the blow a bit. Morgane Delledonne, Global X ETFs head of strategy there. Good to have you on today.