Protests are erupting in cities all across America.
The relationship between Washington and Beijing is melting down at an alarming pace.
And the US unemployment rate is forecast to rise further into levels not seen since the Great Depression.
At first blush, it may sound like a textbook environment for the US dollar to strengthen as investors seek a haven from turmoil.
Yet the opposite is happening.
A gauge of the currency has plunged more than 6% just two months after touching the highest since its inception.
It all makes sense to money managers including Pacific Investment Management Co and Acadian Asset Management, who say the greenback’s weakness may be an indication that the historic market turmoil of March is mostly over.
Much like in stocks, currency traders so far are looking past domestic and geopolitical uncertainty because signs of a nadir in the global recession are emerging as the spread of the coronavirus slows, businesses reopen and central banks inject record amounts of money to revive their economies.
“A lot of the markets are looking ahead potentially six to eight months out of this dark hole and problematic situation, to potentially getting out,” said Clifton Hill, global macro portfolio manager at Boston-based Acadian Asset Management, which oversees $101bn. “The worst-case scenario may have already been priced in, so that began to rally some of those currencies against the dollar.”
Hill is bearish on the dollar versus Group-of-10 currencies, including the Australian dollar, the New Zealand dollar and the euro.
The Bloomberg Dollar Spot Index extended losses this week after dropping 1.2% in May, its biggest monthly decline this year.
The US currency weakened against all G10 peers during the month, except for the yen and pound. At the same time, commodity-linked and emerging-market currencies and stocks are on fire.
Less than three months since the Australian dollar dropped below parity with the kiwi for the first time, it surged back to reach the highest since October 2018.
The Norwegian krone is up around 8% against the dollar in the past month, topping all other G10 currencies.
The euro is hovering near two-month highs, buoyed by the European Commission’s debt-sharing proposal and fiscal package, a positive sign for risk appetite everywhere.
In emerging markets, the Mexican peso and the South African rand are up more than 13% and 10%, respectively, in the past month.
“The dollar is prone to be sold against emerging currencies” where yields are higher, said Akira Takei, a Tokyo-based global fixed-income money manager at Asset Management One Co, which manages about $450bn. “That’s weighing on the greenback.”
The surge of various currencies versus the dollar comes amid alarming events that have stunned investors in recent weeks.
China is threatening to pause purchases of some American farm goods amid a disagreement over Hong Kong.
In the US, President Donald Trump is threatening to deploy the military to end “riots and lawlessness” across the country.
Americans continue to lose their jobs by the millions, with tomorrow’s Labour Department report forecast to show an unemployment rate of 19.5%. Add to that a manufacturing sector still shrinking globally.
Rather than triggering a bid for the dollar as a haven, the unrest in the US and tensions with China actually may be fueling the greenback’s weakness because both are risks to the economic rebound, according to Ben Emons, a macro strategist at Medley Global Advisors.
“The dollar weakness over the last few days could also be an early signal by FX markets that see persistent violence and curfews as a possible disruption of the US economy,” he said.
However, most agree that the dollar’s weakness is in large part a reaction to the Federal Reserve’s moves to counter the coronavirus’s impact on the US. The US central bank has injected billions of dollars and could ultimately deploy trillions in emergency lending.
Even with policy makers cutting interest rates to near 0%, traders have signaled that the Fed could push its benchmark rate negative for the first time ever within the next year.
Meanwhile, the US Congress has authorised $2.9tn in fiscal stimulus, pushing the national debt to record levels.
The Fed’s rate cuts have shaved US interest-rate differentials versus the rest of the world.
The gap between US 2-year yields and German equivalents is at 0.81 percentage point, compared with 2.17 percentage points at the end of last year.
The conditions for the dollar to weaken sustainably are being put in place, according to Hemant Baijal, a portfolio manager at Invesco who is currently neutral on the dollar but is leaning bearish.
As economic growth rebounds, he expects the Fed to prevent nominal interest rates from rising either through forward guidance or through some form of yield-curve control.
If growth picks up and nominal interest rates don’t increase in the US, then the conditions will be particularly right for the dollar to weaken.
“Then we’ll be much more comfortable being significantly bearish on the dollar if those conditions are met,” Baijal said.
As economies try to come out from the lockdown, Pimco’s Sachin Gupta, a global portfolio manager, expects the dollar to decline from current levels.
But he points out that the road ahead may not be a straight path.
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