Pimco Sees Limit to Fed Trade Amid Best Dollar Rally This Year

Pacific Investment Management Co. will take on less currency risk, predicting a limit to how far policy divergence can drive the dollar even as the greenback heads for its best weekly advance this year.

The Bloomberg Dollar Spot Index has climbed 1.2 percent this week as a chorus of Federal Reserve policy makers emphasized the central bank may raise interest rates as soon as April. The dollar should remain “broadly stable” versus the euro and yen, easing pressure on the People’s Bank of China as that translates into relative stability for the yuan against a basket of currencies, according to Pimco, which had $1.43 trillion of assets under management as of Dec. 31.

“We expect to have less currency risk in our portfolios, reflecting the repricing of the U.S. dollar over the past two years, and the limits to global policy divergence,” Joachim Fels, managing director and global economic adviser, and Andrew Balls, chief investment officer for global fixed income at Pimco, wrote in a report Wednesday. “We expect a gradual depreciation of the Chinese currency and the broader Asia currency basket.”

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 major currencies, advanced 0.2 percent to 1,200.79 at 10:52 a.m. in Tokyo, headed for its fifth day of gains and the longest winning streak in more than two months. It has climbed the most this week since the period ended Nov. 6.

The dollar gained 0.4 percent to 112.81 yen and 0.1 percent to $1.1169 per euro. Against the Australian dollar it strengthened 0.4 percent to 75.05 U.S. cents. Crude oil slumped 4 percent Wednesday, the most since Feb. 11.

Bullard Hawkish

Federal Reserve Bank of St. Louis President James Bullard said Wednesday policy makers should consider raising interest rates at their next meeting amid a broadly unchanged economic outlook and prospects of inflation and unemployment exceeding targets. He votes on policy this year. San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart made similar comments about the April gathering earlier this week.

“The risk-off mood from yesterday’s fall in oil is hurting commodity currencies,” said Mansoor Mohi-uddin, Singapore-based senior markets strategist at Royal Bank of Scotland Group Plc. “Markets are focusing on Bullard’s comments as another FOMC member this week sounding more hawkish than last week’s Fed statement and forecasts.”

Pimco View

The U.S. central bank will probably raise interest rates once or twice this year, according to the Pimco report. The Fed kept interest rates unchanged last week and halved projections for how many times it would increase in 2016, from four times projected in December, after Volatility in financial markets and weakening global growth clouded the U.S. economic outlook.

The Pimco Total Return Fund, the world’s biggest actively managed bond fund, returned 0.9 percent this year, underperforming more than four-fifth of its peers.

The Bank of Japan and the European Central Bank are among central banks that look to be harboring “doubts about the efficacy of negative interest rates and are now adjusting their toolkit yet again,” according to the Pimco. The Group of 20 reaffirmed at their meeting in Shanghai last month that they will refrain from competitive devaluations, and agreed to consult closely on currencies.

“We see the currency war receding somewhat, with the recent G-20 statement, central bank rhetoric and actions suggesting that China will refrain from further sharp moves in its currency, a retreat from competitive currency devaluation efforts via negative deposit rates on the part of the BOJ and the ECB and instead a preference for QE and credit easing,” Fels and and Balls wrote.

--With assistance from Wes Goodman To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net, Netty Ismail in Singapore at nismail3@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Jonathan Annells

By: Candice Zachariahs and Netty Ismail

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