The next move for the US dollar could be down

During his “Highway to Hell” webcast, Jeffrey Gundlach put forth several arguments for a bearish long-term outlook for the US dollar (UUP), the most prominent of which was President Donald Trump’s failure to rein in the budget and trade deficits.

Investors should note that the value of the US Dollar Index (USDU) compared to other currencies is affected by changes in the balance of trade. A trade deficit means that foreign goods are in demand, which increases the demand for foreign currency and causes outflows of the US dollar to rise. Over an extended period of time, such a situation will lead to the devaluation of the dollar. Accumulated budget deficits also affect the US dollar negatively over the long term.

Why Gundlach Thinks It’s Time to Be a Long-Term US Dollar Bear

Reasons for the weaker USD outlook

Gundlach cited the change in the Fed’s expectations as the second factor driving the weaker greenback outlook. He said that bond markets aren’t expecting any more rate hikes in 2019 and 2020 compared to the Fed’s target of two rate hikes in 2019. As the Fed inches closer to market expectations, the US dollar could weaken. He also cited technical factors as being in line with a weaker greenback.

Emerging markets to outperform

Gundlach expects emerging markets (EEM) to do better based on the weaker US dollar in the long term. He even thinks that they started outperforming—though modestly—in the fourth quarter. He also thinks that since emerging market equities have started outperforming even without the dollar’s weakness, their underlying strength compared to US stocks is becoming evident.

Chinese stocks JD.com (JD), Alibaba (BABA), and Tencent Holdings (TCEHY) are up 33.4%, 32.0%, and 16.4%, respectively, year-to-date, outperforming the US markets. The S&P 500 Index (SPY) and the NASDAQ Composite Index (QQQ) have gained 12.6% and 15.6%, respectively, in comparison.

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