Good morning,
EURUSD has been on somewhat of a mission of late. Price has now risen nearly 12% since the end of March 2020 – not a bad effort by the single block currency.
GBPUSD is also flexing with a modest 15.44% gain in the same period. Again, not a bad effort considering the Brexit / Covid-19 risk multiplier.
It would be unfair to leave out USDJPY, but with a rather wallowing drop of 6.75%, not many people have been paying attention.
What has happened to the Dollar? Why has the market made a unanimous decision to shelve anything related to the Greenback?
1.) Blame the Fed: The Federal Reserve and the Dollar trade via a whirlwind relationship. By no means are they inversely pegged, but the recent actions taken by Jerome Powell and his team have dynamited logic. Dollar liquidity is now available on tap and there’s almost zero chance of seeing any interest rate changes in the short term. The Fed will remain as accommodating as they can, for as long as they can and this includes things like Dollar swap lines, allowing other central banks to swap treasuries for dollars – In May this facility topped $448bn [ING]. Keeping rates at near zero creates laser focus on inflation, and whether or not the economy can tolerate it. This in turn applies additional pressure to real yields with 10-year treasuries returning -0.93% to the investor [real yields reflect earnings post inflation]. This unprecedented level of Government spending is simply terrifying and very difficult for investors to digest. Debt levels are expected to exceed 130% of GDP by 2021 [Fitch] resulting in the US’s triple-A rating to drop from stable to negative. Running deficits, selling debt and printing endless money at this scale might work well in a simulation, but the markets aren’t buying into it, hence the cheap Dollar.
2.) US elections: Trump has already planted some doubt by suggesting the US elections could be postponed. Does he have the power to do so? It would need the backing of both the Democratic house, and the Republican controlled Senate to pass a new act, so it is very unlikely. That being said, every major political event since the Brexit vote has been muddied by surprises, allegations of corruption and integrity, and I have no doubt that the US election will be void of any “interesting” developments. Given the proximity to voting, this is piling additional pressure on the Dollar and another reason to be less invested.
3.) Reserve Status: There’s no clever science or mathematics behind a reserve currency – It’s all about accessibility and liquidity. The success of US equities, which are reaching all-time highs isn’t necessarily a reflection of what’s happening on the ground, nor a reflection of global sentiment. Making money is all about, well, making money. If government bonds and treasuries are loss making, and the Federal Reserve has committed resources to buying up various ETF [exchange-traded funds] with no cap in sight, it makes perfect sense to go with the trend. However, many sceptics are casting doubt over the long-term recovery of the real economy and there is a general expectation that a bumpy road lies ahead, particularly when you price in continued outbreaks of Covid-19. The US has been widely criticised in its handling of cases and will continue to be under the microscope of the investment community. Perhaps another round of fiscal steroids will lift spirits.
4.) Gold: The dollar index and Gold are trading in perfect inverse correlation. If you’re buying gold, then you’re selling Dollars to fund it – A viscous cycle. Summarising the points above, Gold is a good hedge when the dollar is weak, the Fed are taking a dovish stance and there is a general lack of confidence in central bank policies. The diversification of investing looks relatively simple right now, with US equities performing really well and Gold acting as the “hedge”.
As payment specialists, it’s important we understand what is happening in the wider markets. Businesses who repatriate dollars back to the UK and Europe have seen a 15% and 12% increase in FX costs. Some may have hedged for a period of time, but with the US elections around the corner, it can be very difficult to plan and price your business effectively. Speak to one of our currency experts today.
Have a great day
Author: Alistair Hutson, Senior Relationship Manager
Whilst every effort is made to ensure the information published here is accurate, you should confirm the latest exchange rates with WorldFirst prior to making a decision. The information published is general in nature only and does not consider your personal objectives, financial situation or particular needs. Full disclaimer available here.