As the chart shows, the ‘risk off’ currencies of US dollar, swissie, and yen have all strengthened this year against ‘risk on’ sterling, as have the euro and the commodity currencies too in the last few months. Like the stock market, the currency is weighed down by the perception that the UK has made a pig’s ear of the pandemic and the never-ending farrago of Brexit. Sterling always comes up as ‘undervalued’ on purchasing power metrics so ultimately should see a renewed period of strength but in the short term newsflow, as always, is adverse.
Away from our little local difficulty, the tide may be turning for the US dollar which has been bossing it in the FX markets ever since the GFC in 2008 as the US economy recovered far more quickly than elsewhere. The dollar remains the world’s reserve currency and it is a go-to ‘risk off’ currency but the pandemic has robbed the dollar of its greatest competitive advantage, significantly higher bond yields, as the US Federal Reserve prints dollars on a scale never seen before. We suspect the greenback’s decade of ascendancy may be slowly drawing to a close