Is the US dollar due a bounce?

published 27 August 2020

The dollar’s fortunes could be set to improve, says Neal Kimberley in the South China Morning Post. The US Dollar Index, which measures the greenback’s value against a basket of six other major currencies, has tumbled by more than 9% since March. But the further the dollar falls the more difficult it becomes to argue that it is still overvalued. New European coronavirus outbreaks have taken some of the shine off the rally in the euro. The dollar’s valuation still faces short-term headwinds, says Nouriel Roubini for Project Syndicate. Federal Reserve monetary policy is even looser than that of other major central banks.

Yet in the longer term the currency’s underlying strengths, the dynamism of US companies and the unsurpassed scale and liquidity of the dollar bond market, are likely to re-assert themselves. “Pax Americana is here to stay”, says Imran Said in Quillette. Far from being eclipsed, America’s share of world GDP has held roughly constant since 1980 at about 25% of global output. US equity markets dwarf all others by valuation. Some point to China’s yuan as a potential dollar replacement, yet capital controls limit its prospects. The dollar was used in 38.77% of global payments in July this year. The renminbi’s share was 1.86%.

Another factor driving the dollar’s recent pullback is its status as a safe-haven asset. As markets have rallied in recent months money managers have felt less need for their greenback comfort-blanket. Yet as Steve Goldstein notes in Barron’s, another safe-haven currency is still riding high. Bank of America says investors have been selling the dollar for the Swiss franc. Slumping real bond yields are reducing the appeal of dollar assets, leading US money managers to conclude that they might as well pay up for the safety of the “Swissie”.