STABILIZE: The US dollar has staged a mini rally the past six weeks. Catalyzed by safer haven demand around the US debt ceiling drama. And extended by the outlook for a less dovish Fed, with sticky inflation and Wednesday’s BoC hike. This happened as Europe’s inflation surprise and technical recession dampened the ECB outlook. The Dollar is well-supported, for now, but without the drivers for a sustained breakout rally, and a still pricey valuation. Longer term we see modest weakness. Stability is enough to give relief to hard-pressed currencies, from NOK to the ZAR, and some support to US tech, commodities, and global-focused EU and Japan equities.
RELIEF: A stable or weaker US dollar typically helps emerging markets stocks (EEM), easing USD financing and debt pressures. Also commodities (DJP), which are priced in dollars and become cheaper for foreign buyers. Both are amongst the weakest assets this year. US sectors with large foreign sales, such as IT (XLK) with 57% sales from overseas, would become more competitive with a weaker dollar. By contrast, stronger local currencies impact the large number of global and generally lower profit-margin European (EZU) companies. Over 50% UK and EU corporate sales come from abroad and become less competitive with significant FX strength.
MEASURE: The chart shows the 10-year US dollar appreciation. The well-known DXY Dollar Index is 58% weighted towards the Euro (EU), whilst the trade-weighted USD index is more diverse, and better reflects US trade partners such as China (CNH). Both have rallied 1-3% from recent lows, but are still down 6-8% from last year’s high. LatAm and CEE currencies have led the rally this year, given their big early rate hikes. Sterling (GBP) has been the best of G-10 most traded currencies. Dollar stability could give some relief to the hard-pressed South African Rand (ZAR) and Norwegian Krone (NOK) which are sitting on double digit losses this year.
All data, figures & charts are valid as of 08/06/2023