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SOFTER DOLLAR AHEAD?

There’s a common perception that the value of the US dollar is intricately linked to Fed policy and that the end of a rate hiking cycle typically leads to a weaker US dollar.

Arguing in favour of a softer greenback is the fact most other major Central Banks (especially in Europe and UK) appear to be less dovish than the Fed. Whilst policymakers at the ECB and BoE have also suggested no more rate hikes are in the pipeline, they have been keen to stress any rate cuts remain a long way off. Furthermore, with Japan witnessing its first proper bout of inflation for several decades, there is intense speculation that the Bank of Japan may finally exit from its negative rate policy. This could well be another false dawn, but it would almost certainly drive the Yen higher at the expense of the dollar.

That said, there are several reasons why the US dollar should remain relatively well bid. The main one being that, in the grander scheme of things, there is currently little divergence in global monetary policies. Furthermore, with the UK and European economies barely growing, the relative strength of the US economy bodes well for the greenback. At the same time, the Chinese authorities have been stimulating more aggressively of late, creating a headwind for the Renminbi.

All told, this suggests the dollar is unlikely to make a major move up or down anytime soon but, providing it doesn’t spike higher, financial conditions should remain relatively supportive to broader risk assets.