The Dollar’s Stability Appears Illusory as Tumult Abounds in Currency Markets
The comments below are an edited and abridged synopsis of an article by XM.com
Global currency markets are tumultuous right now. Ongoing US-China trade tensions, the possibility of Fed rate increases and China’s slowdown are all concerning trends
The dollar’s stability is key to the health of those markets. Along with geopolitical factors, the domestic policy decisions of President Trump also threaten its solidity.
After a turbulent end to 2018, this year is off to a volatile start. A flash crash occurred in the first two days of trading, but some of the pessimism regarding world growth has lessened. While 2018 was all about the dollar, it got off to a softer start in 2019 as expectations of further rate hikes by the Fed faded. But as predictions of a dollar downtrend gather, there is little on the horizon that bodes well for other currencies.
Following a year of dollar strength, the risks surrounding the greenback in 2019 are subsiding. The Fed is approaching/has reached terminal rates, at a time when most other central banks are preparing to start their own tightening cycles. Hence, the monetary policy divergence theme may have run its course, and the dollar’s appeal could lessen.
Although markets have turned a blind eye, investor concerns about the fiscal and current account deficits could return, especially if the economy slows more sharply than anticipated and the higher tariffs have no effect in narrowing the trade deficit with China. Political gridlock in Washington and the constant threat of government shutdowns could also haunt the dollar.
Any further deterioration in US-China trade relations may see the dollar attract fresh safe-haven bids. Likewise, if Congress agrees on a massive infrastructure program that has the potential to boost growth and inflation, it would be a game-changer.
Up for discussion: risks to recovery; declining trends; and the downward skew.