What ails "King Dollar"

We live in a world where the US dollar dominates – meaning more trade and financial transactions use it  and more are held by global central and commercial banks than any other currency. Simply put, the US dollar is the world’s reserve currency and our country’s ability to print it is – as former French Finance Minister Valery Giscard d’Estaing put it – an “exorbitant privilege.”

While no other currency is likely to knock “King Dollar” off its throne anytime soon, the greenback can and does move down in value relative to other currencies. The US Dollar Index/DXY compares the value of the US dollar to a weighted basket of six currencies used by US trading partners, and it has recently  traded to a two plus year low. Historically, the long-term factors impacting the value of one currency versus another include interest rates, inflation, economic growth, government debt and deficits, and political stability.

If we were to point to catalysts for the near-term weakness in the dollar, they would include unprecedented US deficit spending, more encouraging (on balance) COVID-19 data outside the US, a dramatic bounce back in China’s economy, the strong EU fiscal response to COVID-19, US social unrest, and the upcoming US Presidential election (and the associated uncertainty it brings to US fiscal policy). Maybe more important than the causes of currency weakness are the investment implications of a declining dollar, which has historically been a headwind for traditional fixed income and a tailwind for commodities, as most are priced in US dollars – so as it moves lower, they move higher in price. Equities too experience this tailwind, particularly developed international and emerging market equities, as well as those US companies with meaningful ex-US revenue streams, as those sales are worth more once converted into a depreciating US dollar.

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Tagged: weekly wire, market perspectives, Tim Holland, 2020 election, US dollar, COVID-19