CBR
search

What does the weakening dollar mean for investors?

The  DXY, the U.S. Dollar Index or the value of the United States dollar relative to a basket of foreign currencies, slumped to multi-week lows towards the last week in October.

The U.S. Dollar Index or the value of the United States dollar slumped to multi-week lows towards the last week in October. (Photo: Coin Codex)

Cited factors for this decline are escalating trade tariffs battles between China and the United States and the worlds’ leading central banks taking decisions to cut interest rates as global growth expectations weaken.

On October 17, the greenback against the basket of currencies traded down at 98.17, having touched a low of 98.30 earlier, its lowest since September 20.

On October 18 it slid further to 97.35, down -0.26%.

Escalating trade battles between the US and China have contributed to the decline of the US dollar. (Photo: A Markets Report World)

Econotimes noted that the euro also declined after data showed Eurozone inflation dropped to its slowest pace in nearly three years in September, more than previously estimated.

The standoff between major trade partners the United States and China continues, with negative effects on global growth.

The European Central Bank in Frankfurt (Politico.eu)

China does wants America to go beyond promising no new tariffs and to start removing existing ones.

Top of form/ bottom of form

That unpredictability is a problem, analysts note.

The Economist quotes Gita Gopinath, the IMF’s chief economist, as declaring in mid-October that “prolonged trade-policy uncertainty is damaging the world’s economy.”

Boris Johnson suffered another Brexit defeat in the House of Commons and will now be needing an extension to the UK’s membership of the EU.

The Fund again cut its forecast for global growth. Gopinath noted that manufacturing firms have become more cautious about long-term spending and have held back on equipment and machinery purchases.

Meanwhile, the negative spectre of trade war is also depressing investment spending.

The IMF headquarters in Washington DC, the United States.

The IMF says it now expects the world economy to expand by just 3% this year, compared with 3.6% last year, which would be  the slowest rate in the decade since the global financial crisis.

The Economist noted that both America and the euro zone are expected to grow more slowly this year than the IMF had envisaged in July, before trade tensions escalated.

Just as well, India’s prospects have dimmed sharply: it is forecast to grow by 6.1% rather than the 7% expected only months ago. Meanwhile China is now projected to expand by less than 6% in 2020, for the first time in 30 years.

India’s prospects have dimmed with a revised 6.1 per cent growth. (cnn.com)

Geoplitical tensions escalated on  October 15th when the US House of Representatives passed a measure enjoining America to assess Hong Kong’s autonomy annually and sanction officials who violate it. China reacted angrily , describing the action as meddling.

Elevated tensions between Washington and Beijing will continue to weigh on the global growth outlook. There is also the impact of Brexit.

Brexit

The UK is expected to leave the EU on October 31. (Photo: vox.com)

The UK is expected to leave the EU on October 31. The economy awash in negative sentiment, is shrinking and so is the value of the pound sterling.

British Prime Minister Boris Johnson, announced a new agreement with the EU on Friday October 18,  and was banking on support from the Tories, in an effort to reverse the trajectory of expectations.

“Contrary to popular belief, we find that US equities tend to underperform equities in the rest of the world when the dollar weakens. A turn in the U.S. business cycle would only exacerbate this dynamic.”

– Stanley Morgan Chief Cross-Asset strategist Andrew Sheets

But on Saturday October 19th, Boris Johnson suffered another Brexit defeat in the House of Commons and will now be needing an extension to the UK’s membership of the EU.

Johnson needs 320 MPs to get Brexit done in order to meet his self-imposed deadline of October 31.

Other currencies in the Union were also impacted by Brexit uncertainty.

British Prime Minister Boris Johnson (Photo: politico.eu)

Econotimes noted on October 17 that the Swiss franc rose, retreating from an over one-week low as uncertainty over the outcome of Brexit negotiations undermined investor risk sentiment.

Regional stock indices have also felt the effects with Germany’s DAX rising and France’s CAC 40 sliding lower, affected periodically by Brexit fog.

The DAX is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange.

“I want a strong dollar, but I want a dollar that does great for our country, not a dollar that’s so strong that it makes it prohibitive for us to do business with other nations and take their business.”

– US President Donald Trump

The Paris Stock Exchange , known as the NYSE Euronext (NYX), trades both equities and derivatives and posts the Consumer Advisory Council or CAC 40 Index.

 President Trump favours a weaker dollar

President Donald Trump has argued that the dollar as it currently stands, is too strong and needs to be lower to help sell American goods.

He must therefore be happy with what is happening to the world’s reserve currency.

US President Donald Trump (Photo: politico.com)

If the US dollar is worth less relative to other currencies, other nations are likely to purchase more U.S. goods, thus boosting American manufacturing and aiding in closing the trade deficit.

Commenting on his position on the dollar Trump explained: “ I want a strong dollar, but I want a dollar that does great for our country, not a dollar that’s so strong that it makes it prohibitive for us to do business with other nations and take their business.”

The President believes that both China and Europe have been manipulating their currencies to the detriment of the U.S. economy and its goods producing sector.

He recently wrote on his social media platform: “China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA. We should match or continue being the dummies who sit back and politely watch as other countries continue to play their games – as they have for many years!”

According to many analysts, the US Dollar Index is forecasted to fall by 10 per cent by the time the U.S. Presidential election comes around next year.

So what does a weakening dollar mean for USD assets and should investors look elsewhere?

Global Head of FX and Emerging Market Strategy at Morgan Stanley, Hans Redeker is of the view that, “In all, we could see a vicious cycle emerging, as dollar weakness makes holding USD assets less attractive, driving asset de-risking and in turn, repatriation and dollar weakness.

Global Head of FX and Emerging Market Strategy at Morgan Stanley, Hans Redeker
(Photo: Pound Sterling Live)

His colleague at Morgan Stanley, Chief Cross-Asset strategist Andrew Sheets shared his sentiment.

“Contrary to popular belief, we find that US equities tend to underperform equities in the rest of the world when the dollar weakens. A turn in the U.S. business cycle would only exacerbate this dynamic.

“Historically, dollar peaks have troughs in non-U.S. equities. This only supports our case to overweight non-U.S. stocks.”