After nosediving through the middle of October, the U.S. dollar is rising again. The trend is expected to continue even as the Federal Reserve moves to prop up the economy on Wednesday with a third interest-rate cut.
For all its pitfalls – and there are many – the U.S. economy is still in a better place than most of its advanced industrialized peers. Domestic inflation is trending higher than Europe’s at a time when global growth expectations are being cut in unison. This means the U.S. dollar is likely to outperform the euro in the short run.
The same holds true for the British pound, a currency that has faced systemic devaluation since the United Kingdom voted to leave the European Union (EU) more than three years ago. Although Brexit continues to be delayed, the EU recently approved the U.K.’s request for a three-month extension running through Jan. 31, 2020.
For the rest of 2019, the dollar is expected to strengthen against most currencies except the yen, according to Bank of America. Although the bank believes the dollar is overvalued, global macro risks should keep it trekking higher.
While multiple rate cuts by the Fed usually don’t bode well for the greenback, central banks around the world are messing with monetary policy in more unconventional ways, according to portfolio manager Scott Kimball.
In an interview with Bloomberg, Kimball said:
Central banks are messing with policy in atypical ways and, in the midst of that, everyone is scrambling toward liquidity doors … Negative rates overseas and weak currencies abroad are going to continue to drive people into positive rates and strong opportunities. There’s nothing we see that’s going to deter the dollar, even in these unusual times.”
The liquidity shortfall that Kimball eluded to is being felt in the overnight repo market, where massive dollar shortages are prompting the Fed to inject hundreds of billions of dollars since mid-September.
Once again, the dollar seems to be the cleanest shirt in the dirty basket of fiat currencies – at least, for now.
The U.S. dollar index (DXY), which tracks the performance of the greenback against a basket of six currencies, edged slightly lower on Tuesday.
DXY peaked at 97.93, its highest in almost two weeks, before reversing gains later in the session. It was last down 0.1% at 97.68, according to Bloomberg. The greenback has rebounded 1.4% since Oct. 18 when it crashed to three-month lows. The sharp reversal came around three weeks after DXY surged to fresh two-year highs.
Foreign exchange markets could see plenty of volatility Wednesday as the Federal Reserve announces its latest policy decision. Fed Fund futures prices imply a 97.3% likelihood of a rate cut on Wednesday, according to CME Group.
Last modified: September 23, 2020 1:14 PM