The US dollar had been taking a pounding over the last 18 months, falling over 10% against a basket of major world currencies in 2017, but climbed off the floor to rally around 5% in the quarter. Rather than renewed confidence in the greenback for fundamental reasons it was more a case of ‘the least dirty shirt’ with Italian political woes and disappointing economic data undermining the euro. It was a similar story for sterling with lacklustre UK growth numbers and international investor concern over Brexit and Corbyn proving headwinds.
It is too early to tell whether or not we have reached a tipping point and change in trend towards dollar strength but if this does prove to be the case then this would have major implications for financial markets. A strong greenback is traditionally a headwind to riskier assets notably Emerging Markets and commodities. It would also dent the earnings of the big US multi-nationals, though is conversely a tailwind to the globally earning companies domiciled in UK and Europe.
Year to date sterling is pretty much flat against the euro, about 3% weaker than the dollar with the strongest of the major currencies being the yen which has climbed by 5% against sterling.
A question frequently asked is why is the dollar not much stronger given the significant interest rate differential US bonds have over German Bunds and Japanese JGBs, the answer being that Fed tightening is causing the FX hedging costs to rise to ruinous levels and the US 10 year may have to yield at least 3.5% before it looks attractive to big overseas buyers.
Getting down with the kids, Bitcoin is currently trading below US$6000 after falling precipitously from its giddy US$20,000 in December. For the more esoteric, Ethereum is trading around US$420 and Litecoin at US$73. No, that doesn’t mean much to me either and I’m certainly not the go-to man on cryptos.
We have always said that predicting currency movements is a high risk manoeuvre, maybe even a mug’s game. This is arguably even more the case now that geopolitics is playing a far more important role in the financial markets. With this in mind, we are sitting firmly on the fence and expressing no strong views.
Summary: The US dollar rallied in the quarter as political travails and disappointing economic data proved headwinds to the euro and sterling. Predicting FX movements remains as fraught as ever and we are not basing any significant portfolio decisions on currency forecasting.