9 August 2020
Source: Bloomberg & Momentum Global Investment Management
What this chart shows
The chart shows the year to date performance of the US dollar against a trade-weighted basket of ten global currencies (both developed and emerging markets). It highlights the dollar rally into March and its subsequent weakening. July was the dollar’s worst month for a decade, due to a range of factors including growing political uncertainty and fears that the rising infection rates will impact the economic recovery requiring further monetary stimulus, noting that the US experienced a record GDP contraction in Q2, equivalent to an annualized decline of -32.9%. Stronger data and news flow elsewhere have also served to boost other currencies recently – pound sterling has strengthened despite ongoing Brexit headwinds (PMIs hitting 5-year highs helped) and the euro has been boosted by the new European Recovery fund.
Why this chart is relevant
A strengthening or weakening dollar has ramifications across the globe, from its impact on the cost of borrowing to commodity prices to simply being felt through currency exposures within investment portfolios. The relationship between the dollar and emerging markets is also well referenced. A weaker dollar makes it more affordable for emerging market countries to service their externally financed debt and the opposite is true when the dollar strengthens. Commodities are typically priced in dollars and a weaker dollar makes them more affordable for holders of other currencies thus likely attracting demand, as we showed last week through gold’s strength. One reason for dollar weakness recently is lower real interest rate differentials with other countries as inflation expectations have picked up. The lower real interest rate advantage makes the dollar less attractive and therefore weaker. The dollar’s perceived status as a safe haven currency means it can also be a useful indicator of risk appetite in markets, particularly relevant this year as we witnessed in March.
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