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Pimco's chief operating officer is bearish on major currencies, expressing the fund's preference for emerging markets, particularly the ruble and renminbi
The near-term outlook for the US dollar and the euro remains bleak, but emerging market currencies - particularly the Russian ruble and Chinese renminbi - have structural advantages, according to a senior official at Pimco.
Speaking in the keynote address at the FX Week USA conference in New York this morning, Doug Hodge, chief operating officer of Pimco, delivered a sobering assessment of the weaknesses blighting traditional reserve currencies, pointing out the value of the dollar on a trade-weighted basis had declined ever since 2001, while the introduction of the euro in 2002 changed the way central banks manage their reserves.
"As they accumulated the euro, the US dollar declined from roughly 73% [of global reserve currency holdings] down to 62%. We have seen a secular decline in the trade-weighted value of the dollar ever since," Hodge explained. "In the past couple of years, as the value of the euro has declined through the eurozone debt crisis, other currencies, most notably the Canadian and Australian dollars and some emerging market currencies, have begun to replace the euro as a reserve currency. Here at Pimco, we believe this will be the secular trend of the future and it will impact the US dollar, euro and the other established reserve currencies."
Pimco's expectations for Japan are no better, Hodge explained, noting that even though the quantitative easing (QE) programme initiated by the US Federal Reserve over the past four years has led to the central bank holding approximately 30% of all outstanding US Treasury bonds - and is currently buying close to 80% of all new issues - the counterpart Japanese QE programme is between three and four times larger than the US initiative, which has contributed to a 13% decline in the value of the yen, a depreciation the fund expects to continue.
Pimco is far more bullish on the growth prospects offered by both Russian and Chinese currencies, with the latter occupying a disproportionately small segment of global forex markets, relative to the size and potential of China's burgeoning economy.
"The Russian ruble is interesting, and this is one of the currencies in the emerging markets category we think will continue to grow. Russia has some very positive dynamics, the debt dynamics have been improving over recent years, while Russian growth has inched on of late. They are on a path to institutionalise and globalise their currency and we are seeing the trade volumes increase consistently, so this is a currency we are very favourable on," said Hodge.
"China is the same story," he added. "The Chinese have always instituted very tight currency controls but they are starting to loosen some of the regulations. While China is the world's second largest economy and largest exporter, it is only the thirteenth most traded currency in the world, accounting for 1% of all transactions, so there is ample scope for the Chinese to continue to globalise their currency, which we believe they will - albeit on a very measured time frame."
The near-term outlook for the US dollar and the euro remains bleak, but emerging market currencies - particularly the Russian ruble and Chinese renminbi - have structural advantages, according to a senior official at Pimco.
Speaking in the keynote address at the FX Week USA conference in New York this morning, Doug Hodge, chief operating officer of Pimco, delivered a sobering assessment of the weaknesses blighting traditional reserve currencies, pointing out the value of the dollar on a trade-weighted basis had declined ever since 2001, while the introduction of the euro in 2002 changed the way central banks manage their reserves.
"As they accumulated the euro, the US dollar declined from roughly 73% [of global reserve currency holdings] down to 62%. We have seen a secular decline in the trade-weighted value of the dollar ever since," Hodge explained. "In the past couple of years, as the value of the euro has declined through the eurozone debt crisis, other currencies, most notably the Canadian and Australian dollars and some emerging market currencies, have begun to replace the euro as a reserve currency. Here at Pimco, we believe this will be the secular trend of the future and it will impact the US dollar, euro and the other established reserve currencies."
Pimco's expectations for Japan are no better, Hodge explained, noting that even though the quantitative easing (QE) programme initiated by the US Federal Reserve over the past four years has led to the central bank holding approximately 30% of all outstanding US Treasury bonds - and is currently buying close to 80% of all new issues - the counterpart Japanese QE programme is between three and four times larger than the US initiative, which has contributed to a 13% decline in the value of the yen, a depreciation the fund expects to continue.
Pimco is far more bullish on the growth prospects offered by both Russian and Chinese currencies, with the latter occupying a disproportionately small segment of global forex markets, relative to the size and potential of China's burgeoning economy.
"The Russian ruble is interesting, and this is one of the currencies in the emerging markets category we think will continue to grow. Russia has some very positive dynamics, the debt dynamics have been improving over recent years, while Russian growth has inched on of late. They are on a path to institutionalise and globalise their currency and we are seeing the trade volumes increase consistently, so this is a currency we are very favourable on," said Hodge.
"China is the same story," he added. "The Chinese have always instituted very tight currency controls but they are starting to loosen some of the regulations. While China is the world's second largest economy and largest exporter, it is only the thirteenth most traded currency in the world, accounting for 1% of all transactions, so there is ample scope for the Chinese to continue to globalise their currency, which we believe they will - albeit on a very measured time frame."