By Amrith Ramkumar
The dollar has made a sharp U-turn this summer following a long
rally, confounding many traders but potentially adding fuel to this
year's surprising stock-market rebound.
The ICE Dollar Index, which measures the dollar against a basket
of other major currencies, in July notched its worst month in
nearly a decade and recently hit a two-year low. The fall extended
a reversal that began in late March, spurred lately by ballooning
worries that mounting coronavirus cases will stall the U.S.
economic rebound, even as growth accelerates in countries from
China to Germany.
Big-name investors such as Ray Dalio and Jeffrey Gundlach have
recently said publicly that the flood of U.S. government spending
being injected into the financial system could eventually stoke
inflation, eroding consumers' purchasing power. Surging budget
deficits tend to make investors less likely to hold a country's
currency. Fitch Ratings on Friday revised its credit rating outlook
for the U.S. to negative from stable, though it maintained its top,
At the same time, the currency's slide is adding further support
to the booming market rally, lifting stocks and commodities. A
weaker dollar boosts multinational companies, which see their
products get more competitive abroad and can more easily convert
overseas profits into dollars. It also makes products and
investments that are priced in the currency cheaper for overseas
investors, supporting demand for a host of financial assets. U.S.
stocks have climbed near five-month highs recently, while raw
materials are paring much of their 2020 decline.
"These things are denominated in dollars, and the dollar is
getting crushed," said Christopher Stanton, chief investment
officer of Sunrise Capital Partners. He expects the trend to
continue and is directly wagering against the currency, betting on
gains in the euro against the dollar and buying gold, which some
investors are using as an alternative store of value. Gold recently
climbed to all-time highs for the first time since 2011.
The dollar's decline upends a yearslong climb that was fueled by
bets that U.S. economic growth would outpace activity overseas and
let the Federal Reserve keep interest rates among the highest in
the developed world. Now, the coronavirus is forcing the central
bank to keep rates near zero, slicing much of the gap between rates
in the U.S. and other nations and limiting investor returns from
holding the currency.
Despite the tumble, few on Wall Street believe the dollar is on
the brink of losing its status as the world's reserve currency,
held in bulk by global central banks and used to finance most
international transactions. The dollar remains relatively strong
following its long climb, and analysts say economic data points
like export growth justify the reversal. Dollar reserves also tend
to increase when the currency weakens because it gets easier for
central banks to add to their dollar assets.
Still, its reversal marks a key development for money managers.
Investors this week will seek to gauge whether the U.S. economic
recovery slowed last month by parsing the July jobs report and
purchasing managers' indexes. The next round of corporate earnings
from companies, including Booking Holdings Inc. and Hyatt Hotels
Corp., will also provide a window into the prospects for the
bruised travel industry.
Firms that earn more money overseas could benefit if the
dollar's recent weakness persists. So could international markets
-- many have long trailed U.S. stocks, but with growth overseas
poised to catch up to domestic economic activity, they are now in
position to attract more capital.
"The other houses are now looking just as attractive," said
Nancy Perez, senior portfolio manager at Boston Private, which has
recently increased its investments in shares of companies based in
emerging markets in its asset-allocation strategies. "They have
much more potential than the U.S."
Hedge funds and other speculators are favoring everything from
the Swedish krona to the Brazilian real, positioning for more
dollar weakness. Net investor bets on a weaker dollar recently
climbed to their highest level since April 2018, Commodity Futures
Trading Commission data compiled by Scotiabank show.
"We are in a stage of very high momentum," said Ed Al-Hussainy,
senior interest-rate and currency analyst at Columbia Threadneedle
Investments. He is betting that emerging-market currencies such as
the Mexican peso and South African rand will extend their recent
rebound. "Everybody is getting caught up in it."
The latest drop in the currency comes with the euro surging
Thursday to two-year highs against the dollar after European Union
leaders recently agreed on a more-than-$2 trillion spending
The aid is bolstering investors' faith in the bloc's unity and
economic recovery since European countries hadn't spent as much
previously. Many of the countries have also been more successful
than the U.S. in containing the pandemic.
"There are now doubts about the idea that the U.S. would end the
year in a better place than Europe," said economist Brad Setser, a
senior fellow at the Council on Foreign Relations.
Investors say that the economic picture could make this dollar
slide longer lasting, with Fed programs also alleviating early-year
dollar shortages in overseas funding markets. But some are still
wary of reading too much into the recent drop, with November's
presidential election among the factors that could shift already
volatile economic conditions.
Some analysts also question whether the weaker dollar will end
up boosting exports and other economic data points given the scope
of the global recession.
"It's nearly impossible to figure out exactly what the numbers
will end up being," said Megan Horneman, director of portfolio
strategy at Verdence Capital Advisors.
Write to Amrith Ramkumar at firstname.lastname@example.org
(END) Dow Jones Newswires
August 02, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.