The dollar is closing in on its highest levels for the year against other major currencies, propelled by investors’ worries about global growth rather than cheer over U.S. prospects.
U.S. Dollar Index, which measures the greenback against the currencies of major trading partners, rose above 93 on Wednesday morning, according to FactSet. It has only closed higher this year on the last two days in March, when it peaked at 93.3.
The global economy has been accelerating out of Covid-19 restrictions, led by an American economy turbocharged by high government spending. In the first three months of this year, that led to a strong dollar rally from a low of 89.4 in early January to the March high.
Investors are now growing more concerned that the U.S. recovery is reaching a plateau. The infrastructure bill that promised the next big wave of government stimulus could also take longer to be signed into law and may be smaller than expected. At the same time, China’s economy is slowing and the highly transmissible Delta variant of the coronavirus looks likely to force some countries to reverse, or at least slow, their reopening plans.
That is prompting caution among investors.
head of North American macro strategy at
said the greenback’s move against the Canadian dollar represents the sum of all market fears and the clearest sign of what he calls “risk aversion.”
“The Canadian dollar is a very good example of how risk aversion is growing in global asset markets,” he said.
Near the start of June, one dollar bought 1.20 Canadian dollars. Now it buys C$1.27, a roughly 5.5% gain. That is a stronger run than the near 3.5% gain in the wider dollar Index.
The dollar tends to strengthen either when the U.S. economy is doing much better than the rest of the world, or when the world is struggling and U.S. assets such as Treasurys become a haven. The dollar tends to weaken when many countries are growing well together.
Right now, the dollar’s strength seems linked to fears that the pace of the global recovery may already have peaked. In other words, the dollar has become a haven against uncertainty or disappointment.
This view is supported by other typical haven currencies such as the Japanese yen and the Swiss franc, which have been strengthening versus the Canadian dollar and the euro.
But there are other factors at work. Paul Meggyesi, strategist at
& Co., is recommending increased bets against the Canadian and New Zealand dollars in favor of the greenback. That is because many investors have been caught with large bets in the opposite direction.
Many investors previously bet that major currencies would strengthen against the dollar because of expectations of an increasingly reliable global rebound from Covid-19. Mr. Meggyesi’s team had also recommended such trades until recently.
Those positions are being unwound. Hedge funds, for example, have cut their bets against the ICE dollar Index dramatically since the start of July, according to weekly commitments of traders data in FactSet. Leveraged investors’ weekly net short position against the dollar has gone from about 13,300 on July 2 to about 2,900 at the end of last week.
Some investors still expect the dollar to continue to strengthen because they forecast the U.S. economy will keep beating the rest of the world, despite this week’s jitters over Covid-19, government stimulus and growth.
“Divergence between the U.S. and the other major economies will remain a key feature of the post-Covid recovery: growth prospects and, especially, inflation pressures appear considerably stronger in the U.S.,” said
senior markets economist at Capital Economics in London.
Many investors still expect U.S. Treasury yields to finish the year higher than current levels, and perhaps even above March’s peak of 1.75%, despite the recent drop to about 1.2%. At the same time, yields in markets like Europe, especially, are expected to remain pinned at ultralow or negative levels due to ongoing problems in kick-starting inflation.
That would make the U.S. assets more attractive and support the dollar.
Write to Paul J. Davies at firstname.lastname@example.org
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