In the past, President Trump has never hidden his disdain for the Fed and its hawkish policies, repeatedly drumming up the fact that the central bank’s interest hike regime was contributing to an overly brawny dollar and a sluggish economy. Trump had even gone as far as asking the White House to explore ways to weaken the currency in a bid to boost exports and spur economic growth. The dollar has strengthened for much of the past decade, something that has been blamed for the U.S.’ ballooning deficit.
But now Trump is finally getting what he has always wished for: A weaker dollar, albeit not exactly on his terms.
After hitting a 3-year high on 20th March, the Dollar Index--a measure of the currency’s strength against a basket of six international currencies--has declined nearly 11% in one of its most dramatic slides in years. The greenback has fallen so much that hedge funds have turned bearish against the currency for the first time in years.
Source: Reuters, via The Guardian
Source: Investing.com
According to Bloomberg, last week, net futures and forward positions held by leveraged funds against eight currencies ( not including the dollar), tumbled to -7,881 contracts, essentially meaning that there are more investors betting against the dollar than on it. Indeed, Bloomberg says the shorting spree is partly being driven by bullish bets on the euro, with the european currency having outperformed the dollar by 6% since the beginning of the year.
The euro is currently changing hands at USD 1.194 compared to USD 1.109 on January 1.
Source: XE.com
Stimulus Packages
A key reason why the greenback has been losing momentum can be chalked up to the Fed’s expansionary monetary and fiscal policy as well as its massive Covid-19 relief program. The central bank has undertaken a series of interest rate cuts, with the last one coming in March when it lowered the benchmark rate to 0%-0.25%, marking only the second time that rates were effectively lowered to zero (the first time was during the 2008 financial crisis).
The Fed also launched a $700B bond-buying program as well as a generous stimulus to shelter the U.S. economy from the ravages of the pandemic. This includes up to $2.3 trillion in lending to support state and local governments, employers, households and financial markets. The combined effect of these measures has been an increasing supply of U.S. dollars hence the gradual devaluation.
To make matters worse, the dollar-buying spree that had propelled the early-March dollar rally shortly after WHO declared Covid-19 a global pandemic has cooled off considerably. With a successful Covid-19 vaccine looking increasingly likely, calm has slowly been returning to the global economy and the equity markets. Consequently, the S&P 500 has managed to pare back all its losses and is now sitting on a 4.5% gain in the year-to-date.
Source: CNN Money
The Gold Trade
It’s not all doom and gloom though.
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A weaker dollar is likely to improve the United States’ trade balance by making its exports more competitive. Last year, the IMF said the dollar was overvalued by 6-12% and could have been overvalued by as much as 20% before the slide, so the reset is likely to bring it closer to its true value.
Finally, a weakening dollar has historically been good news to a cross-section of asset classes notably gold, foreign stocks and emerging markets.
Source: Fortune.com
Gold in particular has been on a tear, climbing nearly 30% over the past 12 months to an all-time high of $2,060/oz.
Source: TradingView
With the dollar weakness expected to extend into the next year, this could be a rare opportunity for gold investors to double down especially on gold stocks which tend to act as a leveraged play on gold by amplifying its moves.
Source: CNN Money
By Alex Kimani for Safehaven.com
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