Forex

Analysis – Tumbling U.S. dollar a boon to risk assets across the globe

Published

1 year ago

July 16, 2023

Analysis - Tumbling U.S. dollar a boon to risk assets across the globe

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – Cooling U.S. inflation is accelerating a decline in the , and risk assets around the world stand to benefit.

The dollar is down nearly 13% against a basket of currencies from last year’s two-decade high and stands at its lowest level in 15 months. Its decline quickened after the U.S. reported softer-than-expected inflation data on Wednesday, supporting views that the Federal Reserve is nearing the end of its interest rate-hiking cycle.

Because the dollar is a linchpin of the global financial system, a wide range of assets stand to benefit if it continues falling.

Weakness in the dollar can be a boon to some U.S. companies, as a weaker currency makes exports more competitive abroad and makes it cheaper for multinationals to convert foreign profits back into dollars.

The U.S. technology sector, which includes some of the big growth companies that have led markets higher this year, generates just over 50% of its revenues overseas, an analysis of Russell 1000 companies by Bespoke Investment Group showed.

Raw materials, which are priced in dollars, become more affordable to foreign buyers when the dollar declines. The S&P/Goldman Sachs Commodity Index is up 4.6% this month, on pace for its best month since October.

Emerging markets benefit as well, because a falling U.S. currency makes debt denominated in dollars easier to service. The MSCI International Emerging Market Currency Index is up 2.4% this year.

“For markets, the weaker dollar and its underlying driver, weaker inflation, is a balm for everything, especially for assets outside the U.S.,” said Alvise Marino, foreign exchange strategist at Credit Suisse.

The greenback’s tumble has come as U.S. Treasury yields eased in recent days, dulling the dollar’s allure while boosting a wide range of other currencies, from the Japanese yen to the Mexican peso.

“That sound you hear is the breaking of technical levels across the foreign exchange markets,” said Karl Schamotta, chief market strategist at Corpay. “The dollar is plunging toward levels that prevailed before the Fed started hiking, and we’re seeing risk-sensitive currencies melt up on a global basis.”

A continued fall in the dollar could boost profits for foreign exchange strategies such as the dollar-funded carry trade, which involves the sale of dollars to buy a higher-yielding currency, allowing the investor to pocket the difference.

The dollar’s decline has already made the strategy a profitable one this year: An investor selling dollars and buying the Colombian peso would have collected 25% year-to-date, while the Polish zloty has yielded 13%, data from Corpay showed.

Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US, is bearish on the dollar while betting on gains in the Kazakhstan tenge, Uruguayan peso and Indian rupee.

“When you look at what’s going on right now, the outlook for the dollar remains pretty bleak,” said Upadhyaya, who expects carry trades to thrive if the dollar keeps falling.

In the world of monetary policy, the dollar’s decline may be a relief to some countries, as it removes the urgency for them to support their falling currencies.

Among them is Japan. The greenback has tumbled 3% against the yen this week and is set for its biggest weekly fall against the Japanese currency since January. Yen weakness has been problematic for Japan’s import-reliant economy and raised expectations Japan would again intervene in markets to support its currency after doing so for the first time since 1998 last year.

Traders have also been watchful for potential action from Sweden’s central bank given weakness in the Swedish krona. But this week, the dollar is down almost 6% against the krona and set for its biggest weekly drop since November.

Continued strength in the yen could see investors unwind the large bearish positions that have built up against the currency in recent months, pushing it higher, said Societe Generale (OTC:) currency strategist Kenneth Broux.

Of course, being bearish the dollar has its own risks. One is a potential rebound in U.S. inflation, which could stoke bets on more Fed hawkishness and unwind many of the anti-dollar trades that have prospered this year.

Though inflation has cooled, the U.S. economy has remained resilient compared with other countries and few believe the Fed will cut rates anytime soon, which could potentially limit the dollar’s near-term downside.

Still, Helen Given, FX trader at Monex USA, believes the Fed will wrap up its rate-hiking cycle before most other central banks, sapping the dollar’s long-term momentum.

While the dollar may pare some of its recent losses, “looking six months out it’s likely the dollar will be even weaker than it is today,” she said.

Forex

Dollar now priced for perfection – BoA Securities

Published

23 hours ago

January 8, 2025

Investing.com – The US dollar has rallied strongly since the US Presidential election, from an already high level, and Bank of America Securities sees the currency now priced to perfection.

In real effective terms, BoA estimated that the dollar ended 2024 at a 55-year high, following the longest uptrend in recent decades, which started in mid-2011.

“The USD has also reached extreme levels in nominal terms. Using the BIS NEER broad index (nominal effective exchange rate), the USD is the strongest it has been in the last 30 years, which is when the time series started,” said analysts at BoA Securities, in a note dated Jan. 8.

The dollar appears overvalued by 18.5%, the most in the last 30 years except when it was overvalued by 19% during the energy shocks from the war in Ukraine in 2022, the bank said.

Its overvaluation increased by about 6.4% since the end of Q3 last year, to a large extent because of the US election. By comparison, it was overvalued only by 9.4% at the end of 2016, after Trump won his first US election.

Looking at G10 equilibrium estimates, the USD clearly stands out as the most overvalued – followed by CHF, with JPY and the Scandies being the most undervalued.

“We expect the USD to remain strong in the short term on the back of US inflationary policies, and particularly tariffs, but to weaken later in the year, as these policies take a toll on the US economy while the rest of the world responds. Policy uncertainty makes our baseline subject to substantial risks,” said BoA Securities.

Forex

Dollar boosted by rising Treasury yields; euro slips on weak data

Published

23 hours ago

January 8, 2025

Investing.com – The US dollar rose Wednesday, benefiting from rising bond yields after the release of healthy US economic data, while weak German industrial orders weighed on the euro.

At 04:35 ET (09:35 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher to 108.690.

Dollar gains as Treasury yields soar

The dollar has continued to push ahead Wednesday, following on from the prior session’s positive tone after data showed US unexpectedly rose in November, layoffs were low, while services sector activity accelerated in December and a measure of prices paid for inputs hit a two-year high.

This resulted in 10-year Treasury yields climbing to an eight-month high, while the benchmark 30-year yield came close to the 5% level.

“Yesterday’s US data releases were hawkish for the Fed, and the implied probability of a March rate cut has now dropped below 40%,” said analysts at ING, in a note.

“The most remarkable print was the ISM prices paid subcomponent, which spiked to the highest level since January 2023. If a generally resilient economy was already accounted for when the Fed met in December, a resurgence in inflation concerns could drive an even further hawkish tuning in the policy message.”

The Federal Reserve cut the number of rate cuts it sees this year to two at its December meeting, but traders are now only pricing in around 37 bps of easing through this year, according to LSEG data.

There is more data to digest Wednesday, in the form of the monthly and weekly , ahead of Friday’s release of the closely watched US for further clarity on the health of the world’s largest economy.

German economic weakness weighs on euro

In Europe, fell 0.2% to 1.0326, adding to the losses of around 0.5% overnight after the release of more disappointing economic data from the region’s largest economy – Germany.

fell 5.4% in November, sapped by a decline in large orders, while the country’s fell 0.6%, bursting hopes for a boost from pre-Christmas promotions like Black Friday and Cyber Monday.

Investors are currently looking for the to ease interest rates by around 100 basis points in the first half of 2025.

“There is only a speech by French central bank governor Villeroy to watch in the eurozone calendar today. EUR/USD may find decent support at 1.0300 for now,” said ING.

traded 0.2% lower to 1.2447, with little in the way of economic data due for release Wednesday, and only a speech from Bank of England Deputy Governor Sam Woods to digest.

The held interest rates unchanged last month, and is expected to proceed cautiously with further rate cuts this year with inflation still above target.

Yuan sentiment remains weak

In Asia, rose 0.1% to 7.3511, with the Chinese currency hitting its weakest level in 17 years earlier in the week.

Sentiment remains weak surrounding China ahead of President-elect Donald Trump’s inauguration on Jan. 20, with Trump having vowed to impose steep trade tariffs on China.

gained 0.1% to 158.19, after recovering marginally from its weakest level in nearly six months.

The yen stemmed its recent losses after government officials offered a verbal warning on potential currency market intervention, which saw traders adopt more caution in shorting the Japanese currency.

Forex

Dollar strengthens on elevated US bond yields, tariff talks

Published

23 hours ago

January 8, 2025

By Tom Westbrook and Greta Rosen Fondahn

SINGAPORE/GDANSK (Reuters) -The dollar rose for a second day on Wednesday on higher U.S. bond yields, sending other major currencies to multi-month lows, with a report that Donald Trump was mulling emergency measures to allow for a new tariff program also lending support.

The already-firm dollar climbed higher on Wednesday after CNN reported that President-elect Trump is considering declaring a national economic emergency as legal justification for a large swath of universal tariffs on allies and adversaries.

The was last up 0.5% at 109.24, not far from the two-year peak of 109.58 it hit last week.

Its gains were broad-based, with the euro down 0.43% at $1.0293 and Britain’s pound under particular pressure, down 1.09% at $1.2342.

Data on Tuesday showed U.S. job openings unexpectedly rose in November and layoffs were low, while a separate survey showed U.S. services sector activity accelerated in December and a measure of input prices hit a two-year high – a possible inflation warning.

Bond markets reacted by sending 10-year Treasury yields up more than eight basis points on Tuesday, with the yield climbing to 4.728% on Wednesday.

“We’re getting very strong U.S. numbers… which has rates going up,” said Bart Wakabayashi, Tokyo branch manager at State Street (NYSE:), pushing expectations of Fed rate cuts out to the northern summer or beyond.

“There’s even the discussion about, will they cut, or may they even hike? The narrative has changed quite significantly.”

Markets are now pricing in just 36 basis points of easing from the Fed this year, with a first cut in July.

U.S. private payrolls data due later in the session will be eyed for further clues on the likely path of U.S. rates.

Traders are jittery ahead of key U.S. labour data on Friday and the inauguration of Donald Trump on Jan. 20, with his second U.S. presidency expected to begin with a flurry of policy announcements and executive orders.

The move in the pound drew particular attention, as it came alongside a sharp sell-off in British stocks and government bonds. The 10-year gilt yield is at its highest since 2008. [GB/]

Higher yields in general are more likely to lead to a stronger currency, but not in this case.

“With a non-data driven rise in yields that is not driven by any positive news – and the trigger seems to be inflation concern in the U.S., and Treasuries are selling off – the correlation inverts,” said Francesco Pesole, currency analyst at ING.

“That doesn’t happen for every currency, but the pound remains more sensitive than most other currencies to a rise in yields, likely because there’s still this lack of confidence in the sustainability of budget measures.”

Markets did not welcome the budget from Britain’s new Labour government late last year.

Elsewhere, the yen sagged close to the 160 per dollar level that drew intervention last year, touching 158.55, its weakest on the dollar for nearly six months.

Japan’s consumer sentiment deteriorated in December, a government survey showed, casting doubt on the central bank’s view that solid household spending will underpin the economy and justify a rise in interest rates.

hit 7.3322 per dollar, the lowest level since September 2023.