HSBC 1/9: We hear ever more frequently that the USD is about to enter a bear market, with many market participants calling for a secular decline in the USD. We consider a number of USD bear arguments across three broad categories, but we do not find any to be convincing enough 
HSBC 2/9: to suggest an imminent USD bear market:
1) Cyclical: Bear case: The USD is no longer a high yielder in G10 and the Federal Reserve (Fed) is significantly increasing USD liquidity. Investors will rebalance away from being overweight USD assets due to slowing US growth.
1) Cyclical: Bear case: The USD is no longer a high yielder in G10 and the Federal Reserve (Fed) is significantly increasing USD liquidity. Investors will rebalance away from being overweight USD assets due to slowing US growth.
HSBC 3/9: Our counter-argument: Whether one uses deposit rates or various market forward starting interest rates (which indicate expected future interest rates), the USD is in the middle of the pack in G10 yields (Chart 1) and is not set to become a funding currency.
HSBC 4/9: Other central banks are expanding their balance sheets even faster than the Fed (Chart 2). Our economists forecast very little growth differentiation in G10 economies.
2) Structural: Bear case: The US twin deficits (which consist of both current account deficit and
2) Structural: Bear case: The US twin deficits (which consist of both current account deficit and
HSBC 5/9: and fiscal deficit) are widening rapidly to record levels.
Our counter-argument: Twin deficits are nothing new in the US and the USD has rallied in the face of these pressures before. The question is whether investors are willing to fund the deficit.
Our counter-argument: Twin deficits are nothing new in the US and the USD has rallied in the face of these pressures before. The question is whether investors are willing to fund the deficit.
HSBC 6/9: We believe they are, assuming US growth does not substantially underperform and the USD does not lose its 'safe haven'/reserve currency status.
3) Political: Bear case: The USD's reserve status is diminishing and political issues in the US point to the ongoing erosion
3) Political: Bear case: The USD's reserve status is diminishing and political issues in the US point to the ongoing erosion
HSBC 7/9: of the USD as a 'safe haven' currency.
Our counter-argument: While the portion of reserves held in the USD has declined, this long-term trend does not drive USD performance. The USD is still central to the global financial system.
Our counter-argument: While the portion of reserves held in the USD has declined, this long-term trend does not drive USD performance. The USD is still central to the global financial system.
HSBC 8/9: Payments, lending and FX transactions, for example, are all primarily served by the USD. Right now, there is no alternative to the USD in terms of liquidity or usability.
HSBC 9/9: Other currencies — such as the EUR and the RMB — may gain more share over time, but this is not a strong argument for an imminent USD bear market.
