DOLLAR: The US dollar index (DXY) slumped below 100 last week as lower US inflation cut rate hike expectations, and the stocks rally eased safer-haven demand. The euro-heavy DXY is down 12% from its 20-year high September peak, whilst the broader trade-weighted index is off 9%. LatAm and East European currencies led gains this year, given their early rate hikes, whilst the Euro has breached above 1.10. Japan’s Yen and China’s RMB have been among notable losers, as the interest rate outliers. We see a modestly weaker dollar ahead, that is supportive of risk assets, but with some costs for the most exposed European and Asian exporter markets.
IMPACTS: The boost from the weaker US dollar has been clearly seen in the recent rebound of both emerging markets and commodities, two of the struggling assets this year, and in further tech strength. 1) The weaker dollar typically helps emerging markets stocks (EEM), easing USD financing and debt pressures. 2) Also, commodities (DJP), which are priced in dollars and become cheaper for foreign buyers. 3) Whilst US sectors with large foreign revenues, such as IT (XLK) with 58% sales from overseas, become more competitive. 4) But this could modestly boost US inflation, by raising the cost of imported goods and reversing their recent price fall.
STOCKS: Currency moves particularly impact those economies with a big trade focus. And those markets whose companies do a lot of business overseas (see chart). The most exposed to losing competitiveness from a weaker dollar are the ‘open’ economies and stock markets in Asia and Europe. Led by Hong Kong, Singapore, Netherlands, and Switzerland. By contrast the world’s largest economies and stock markets, like the US, China, Japan, and India, are more ‘closed’. But even here the impacts can be significant. The dollar weakness already seen could give a 3% revenue boost to US companies. Big in the context of the flat sales seen this quarter.
All data, figures & charts are valid as of 19/07/2023.