The US dollar’s rally will fade away

The US dollar, having been widely tipped to fall this year, is up by about 1.2% so far against a basket of six major trading partners’ currencies. But the rally won't last.

“The King is back,” writes Cormac Mullen on Bloomberg. The US dollar was widely tipped to tumble this year, but so far it has proved remarkably resilient. The US dollar index, which measures the greenback’s value against a basket of six major trading partners’ currencies, is up by about 1.2% so far. That wasn’t supposed to happen: Federal Reserve policy is historically loose and global reflation this year should encourage investors to leave their dollar comfort zone and explore opportunities in other currencies. If this continues, then it “will upset quite a few investment strategies”. 

The dollar index fell by almost 7% last year, but the greenback still looks overvalued in historical terms. The index is 15% up on the start of 2010. The currency’s strong start to the year is even stranger because it has accompanied robust gains on world stockmarkets. The dollar is regarded as a safe-haven currency, meaning it should underperform when stocks are feeling bullish.  

A weaker euro 

The dollar’s unexpected pop probably has more to do with the euro, says William Watts on MarketWatch. It is by far the most important comparison currency for the greenback, making up about 58% of the dollar index basket. A slow vaccine rollout is hitting the continent’s growth outlook and thus the euro, which has slipped by 0.8% against the greenback so far this year. The European Central Bank (ECB) will be quite happy about that; it has been fretting that a strong euro could trigger deflation. 

Central bankers in emerging markets aren’t betting on the dollar’s bounce continuing, says Shilan Shah for Capital Economics. From India to Poland, they are rolling out new foreign-exchange purchase programmes designed to curb appreciations of their own currencies against the greenback. Chile will buy $12bn, equivalent to 5% of GDP, in an effort to keep its peso cheap. The “echoes” of past “currency wars” are becoming unmistakable.  

Despite its strong start to 2021, most analysts think that the dollar’s most likely destination is lower. More than 85% of analysts polled by Reuters expect it to “stay around current levels or decline over the next three months”, reports Hari Kishan. The US Federal Reserve, which says it will keep monetary policy easy even if inflation eclipses 2%, is the key reason the currency looks set to fall. “A lot of the exceptionalism of the dollar has to do with its scarcity,” says Steve Englander of Standard Chartered. There is huge demand for the world’s reserve currency and traditionally limited supply. 

Yet with the M2 gauge of US money supply expanding by 24% over the past year, that scarcity is eroding fast; before too long “there will be an abundance”. That should put a lid on the dollar’s mini-rally.  

Recommended

Bitcoin is down more than 50% since its all-time high. What is going on?
Bitcoin & crypto

Bitcoin is down more than 50% since its all-time high. What is going on?

Bitcoin, the world's most popular cryptocurrency, is trading more than 50% below its all-time high in November. Saloni Sardana explains why the digita…
24 Jan 2022
Which assets will benefit as the “jam tomorrow” bubble pops?
Investment strategy

Which assets will benefit as the “jam tomorrow” bubble pops?

With tech stocks, cryptocurrencies and many other “long duration” investments crashing hard, the “jam tomorrow” bubble looks to be bursting. John Step…
24 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Guillaume Pousaz of Checkout.com: the surfer dude catching the fintech wave
People

Guillaume Pousaz of Checkout.com: the surfer dude catching the fintech wave

Guillaume Pousaz moved to California to pursue his love of surfing, and landed in Silicon Valley. He then rode the fintech gold rush to a multi-billio…
23 Jan 2022

Most Popular

Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Three innovative Asian stocks to buy now
Share tips

Three innovative Asian stocks to buy now

Professional investor Fay Ren of the Cerno Pacific Fund highlights three of her favourite Asian stocks to buy now
24 Jan 2022