The continued worldwide spread of COVID-19 (the coronavirus disease) may weaken the U.S. dollar over the long run by impelling multinational corporates and foreign investors in the U.S. to repatriate money back to their home countries, said Kuniyuki Hirai, managing director and head of Trading in the Americas for Mitsubishi UFJ Financial Group (MUFG).
Hirai delivered his remarks at an MUFG media roundtable last week to discuss the coronavirus’s implications for the global economy and currency markets.
A potential exodus of capital
According to Hirai, it is too early to predict the full economic consequences of the coronavirus, since no one yet knows when and how the virus’s spread will be contained. However, he noted, “the coronavirus pressed the ‘stop’ button” by prompting corporates and financial institutions to reassess their investment allocations moving forward.
Hirai added that if the number of infections within and outside China continues to rise and depress economic activity throughout the world, multinational corporates and foreign investors may repatriate capital in an effort to shore up their domestic economic activity. Large-scale repatriation could result in massive outflows of dollar-denominated money back to Asia and Europe—and weaken the dollar against those regions’ currencies.
“For countries that have current account surpluses, history tells us that people may bring their money back,” Hirai pointed out, referring to past instances in which investors from countries with greater capital outflows than inflows—such as in the form of foreign direct investment and exports—tended to repatriate capital to stimulate their struggling economies at home. He cited Japanese corporates and investors, as one example, who repatriated capital from the United States in the mid-1990s in the wake of Japan’s asset bubble collapse and economic woes.
Additional factors affecting the dollar
Hirai mentioned two additional factors that could drive down the dollar:
The coronavirus effect on the currency market
Hirai noted that, unlike equity markets, the foreign exchange market is presently unable to price in the potential economic repercussions of the coronavirus, because currency investors are not yet sure whether those effects will be temporary or structural.
He explained that investors are reluctant to bet on any which currency—or determine what would be the world’s next safe haven currency to which they should flock—solely on the basis of stock-price behavior. “People aren’t fully comfortable looking at the stock market and selling dollars, for example,” he said.
1 As of December 31, 2019, and according to the USD/JPY exchange rate at that date, when assets totaled ¥314.4
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