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Tumbling US dollar a boon to risk assets
REUTERS, New York
Cooling US inflation is accelerating a decline in the dollar, and risk assets around the world stand to benefit.
The dollar is down nearly 13 per cent against a basket of currencies from last year’s two-decade high and stands at its lowest level in 15 months. Its decline quickened after the US reported softer-than-expected inflation data on Wednesday, supporting views that the Federal Reserve is nearing the end of its interest rate-hiking cycle.
Because the dollar is a linchpin of the global financial system, a wide range of assets stand to benefit if it continues falling.
Weakness in the dollar can be a boon to some US companies, as a weaker currency makes exports more competitive abroad and makes it cheaper for multinationals to convert foreign profits back into dollars.
The US technology sector, which includes some of the big growth companies that have led markets higher this year, generates just over 50 per cent of its revenues overseas, an analysis of Russell 1000 companies by Bespoke Investment Group showed.
Raw materials, which are priced in dollars, become more affordable to foreign buyers when the dollar declines. The S&P/Goldman Sachs Commodity Index is up 4.6 per cent this month, on pace for its best month since October.
Emerging markets benefit as well, because a falling US currency makes debt denominated in dollars easier to service. The MSCI International Emerging Market Currency Index is up 2.4 per cent this year.
“For markets, the weaker dollar and its underlying driver, weaker inflation, is a balm for everything, especially for assets outside the US,” said Alvise Marino, foreign exchange strategist at Credit Suisse.
The greenback’s tumble has come as US Treasury yields eased in recent days, dulling the dollar’s allure while boosting a wide range of other currencies, from the Japanese yen to the Mexican peso.
“That sound you hear is the breaking of technical levels across the foreign exchange markets,” said Karl Schamotta, chief market strategist at Corpay. “The dollar is plunging toward levels that prevailed before the Fed started hiking, and we’re seeing risk-sensitive currencies melt up on a global basis.”
A continued fall in the dollar could boost profits for foreign exchange strategies such as the dollar-funded carry trade, which involves the sale of dollars to buy a higher-yielding currency, allowing the investor to pocket the difference.
The dollar’s decline has already made the strategy a profitable one this year: An investor selling dollars and buying the Colombian peso would have collected 25 per cent year-to-date, while the Polish zloty has yielded 13 per cent, data from Corpay showed.
Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US, is bearish on the dollar while betting on gains in the Kazakhstan tenge, Uruguayan peso and Indian rupee.
“When you look at what’s going on right now, the outlook for the dollar remains pretty bleak,” said Upadhyaya, who expects carry trades to thrive if the dollar keeps falling.
In the world of monetary policy, the dollar’s decline may be a relief to some countries, as it removes the urgency for them to support their falling currencies.
Among them is Japan. The greenback has tumbled 3 per cent against the yen this week and is set for its biggest weekly fall against the Japanese currency since January. Yen weakness has been problematic for Japan’s import-reliant economy and raised expectations Japan would again intervene in markets to support its currency after doing so for the first time since 1998 last year.