Dollar slips as Powell pivots
Talk of a US rates pivot (see story above) has knocked the value of the greenback. The dollar index, which tracks the greenback against a basket of major trading partners’ currencies, has slipped 1.3% since Powell’s comments last week. Lower US interest rates and yields prompt investors to sell dollar assets, such as bonds, in search of better returns in other currencies. That’s one reason why a weaker dollar tends to be good news for emerging markets (see page 5).
The dollar index is marginally down since the start of the year, but has defied predictions of a bigger fall as a strong US economy gives the world a hearty appetite for greenbacks. The dollar index is still 13% higher than it was at the start of 2021.
The pound has been a particular beneficiary of the dollar sell-off, says Reuters. While “higher for longer” interest rates are in doubt in the US, they could prove a necessity in the inflation-prone UK. The pound-to-dollar exchange rate has risen 4.7% this year to $1.26; it fell as low as $1.035 at the nadir of last year’s mini-Budget crisis. While the euro has also bounced, traders are sceptical that the European Central Bank will ultimately be as hawkish as it currently claims. Markets currently price about 1.5 percentage points’ worth of rate cuts in both the US and the eurozone next year, compared with 0.8 points in the UK.
The Japanese yen could be another winner, say Yumi Teso and Daisuke Sakai on Bloomberg. Tokyo has kept money ultra-loose even as other central banks tightened, prompting Japanese investors to sell yen in favour of foreign assets. The yen has lost more than a quarter of its value against the greenback over the past three years. But with Japan edging away from negative interest rates – just as the US loosens – the roles may begin to reverse.