The US has historically maintained a strong dollar policy, but cracks have started appearing in the mighty greenback of late.
The currency’s recent slump may turn into further weakness through early next year, as potential progress on US-China trade talks and Brexit along with softer domestic economic data undermine the currency’s haven status, according to Scotiabank.
The Bloomberg Dollar Spot Index is down about 2% from a two-year high reached on October 1, amid its longest weekly losing streak since January. It touched the lowest since July last Friday as Federal Reserve vice chairman Richard Clarida left the door open to a third straight rate cut later this month.
The dollar’s reign over the currency markets is now looking the shakiest since the start of 2018, according to Bloomberg report.
The greenback’s 2% drop this month leaves it on course for the worst month since January 2018 and it’s under threat from the prospect of a Brexit resolution that would hurt haven assets, as well as the odds of more US interest-rate cuts, according to NatWest Markets.
“The dollar’s longstanding bullish outlook is faltering as several key market themes reach their endgames,” according to Mansoor Mohiuddin, senior macro strategist at NatWest.
Should the bearish views prove accurate, it would mark a pullback in what’s been one of this year’s most dominant currency themes. The dollar gained from relatively higher US interest rates and growth, as well as safety bids prompted by global risks such as Brexit.
NatWest sees this changing, as the Fed may ease policy further and with reduced odds of Britain crashing out of the European Union without a deal.
This month also brought a potential breakthrough in trade talks between the US and China, though US President Donald Trump said an agreement probably won’t be signed until he meets his Chinese counterpart Xi Jinping in November.
The strong dollar helped contain inflation during the 1990s, but since the 2008 financial crisis, the rising dollar has made the Federal Reserve’s job harder. The central bank would like to see greater inflation to promote borrowing and economic growth.
The strong dollar may also be depressing domestic demand and pulling down net exports.
Foreign-exchange reserve managers at central banks around the globe, however, expect the dollar to remain dominant for at least another quarter-century.
Roughly 66% of managers believe the greenback will remain the reserve currency of choice over the next 25 years, according to a recent UBS Asset Management survey of 30 central banks.
The US currency accounts for about 62% of global central banks’ $11.7tn foreign-exchange reserves, the International Monetary Fund said last month.
The finding comes as questions emerge over the state of the so-called strong dollar policy and countries like Russia vocally diversify out of the greenback. Bank of England governor Mark Carney railed against the dollar’s hegemony in August, bemoaning the currency’s “domineering influence” on trade.
The dollar’s status as a global reserve currency means that other countries also rely on its stability. Investors should also keep in mind how a strong-versus-weak dollar impacts their investments.
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