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The U.S. currency is having its best start to a year since 2015, defying the expectations of many forecasters and potentially adding global growth headwinds.
The Bloomberg dollar index has climbed 1.9% since the end of December, spurred in part by demand for havens as the global spread of the Wuhan coronavirus and other uncertainties dent investor appetite for riskier assets. The greenback, which is up against all of its Group-of-10 peers in 2020, has also benefited from stable U.S. economic data and bond yields that remain high relative to the rest of the world even as interest rates slide.
A weaker dollar would “contribute to global recovery,” Invesco Asset Management’s Arnab Das said this week at the TradeTech FX conference in Miami, where the resilience of the greenback was a key topic of discussion. “That would be fairly bullish for pretty much the rest of the world. But the chances of that are not as high as I would like to think.”
Many forecasters came into 2020 expecting that U.S. growth might trail other parts of the world and act as a drag on the American currency. They are now being forced to reassess. Resource-related currencies such as the Norwegian krone and the Australian dollar have tumbled as concern about China has smacked commodity markets and undercut expectations for global growth.
The euro, meanwhile, has slumped to its lowest level against the dollar in almost three years after data showed industrial production in the common-currency region shrinking and the German economy flatlining.
For Ben Emons at Medley Global Advisors, the weak outlook will hinder the European Central Bank’s ability to bring rates back up, and that should provide another support for the dollar against its trans-Atlantic peer.
“Productivity and investment are likely to remain at very low levels for years to come,” he said in Miami. “The ECB may therefore not be in a position to normalize negative rates” and he said he’s betting that the greenback will continue to rise against the common currency.
There are also expectations that the Federal Reserve will struggle to lift rates too, and the market is currently pricing in further easing. But that may do little to dent the allure of the greenback.
“When the Fed shifted gears to easing and cutting rates, all it really did was open the door for everybody else to either cut rates or increase the size of balance sheets, or both,” Das said. “So the interest-rate differential, monetary-policy differential, balance-sheet differential arguments in favor of a weaker dollar haven’t worked either. Those issues are still going to be there for some time to come.”
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