Morgan Stanley: US Dollar to Strengthen on Yuan Move
June 21, 2010 at 11:17 UTC || By Forex Playmaker
The US dollar will strengthen against non-Asian currencies, following China’s move to drop the yuan’s two-year-old currency peg to the greenback, according to Morgan Stanley.
The People’s Bank of China signaled that it will drop the yuan peg to 6.83 US dollars, which the central bank implemented in order to shield China’s domestic export industry. The bank warned, however, that is sees no basis for “large scale” moves for the currency, as it allows for greater “flexibility” in the yuan’s valuation.
According to analysts at Morgan Stanley, “The initial implication for the foreign exchange market would be for the dollar to trade stronger against non-Asian currencies, especially versus those that benefit from reserve diversification such as the euro.”
The analysts add that “China’s move is likely to weigh on euro sentiment, as markets price the likely reserve reduction by China, even before we see physical reduction in reserves themselves.”
Morgan Stanley remains short the euro, the British pound and the Australian dollar and long the US dollar, the Singapore dollar and the South Korean won. (Very similar to my own positioning, as a matter of fact.)
In trading today, the US dollar is only slightly lower, as riskier currencies get a boost from a broader rally for riskier assets.
