The US dollar touched a 15-month low on Tuesday, reflecting growing market doubts that the US economy can grow fast enough for the Federal Reserve to meet even its own modest interest rates target.
The “DXY” index that measures the greenback against a basket of its major peers has fallen for seven straight days — its longest losing streak in over a year. On Tuesday it fell as much as 0.8 per cent to below 92, a level last plumbed in January 2015.
Although the gauge later clawed back its losses to trade at 92.83, currency strategists said the trend pointed to further declines.
The dollar has now “broken free” from its range and is “heading lower”, said Kit Juckes, FX strategist at Société Générale. “We are going to overshoot from here.”
Only four of the 32 largest currencies in the world have failed to gain against the dollar this year, complicating the landscape for economic policy globally.
Policymakers in the eurozone and Japan are seeking to increase stimulus to raise growth levels and inflation, but instead find their strengthening currencies having the opposite effect.
In the US, which has already started to raise rates, the dollar’s fall may increase inflationary pressures and boost growth.
Nowhere is dollar weakness felt more keenly than in Japan. At one stage, the dollar was worth as little as ¥105.5, a value not seen since October 2014, thanks in part to the Bank of Japan’s decision last week not to act on expectations of more aggressive monetary stimulus.
The euro is also higher than the European Central Bank would probably prefer, topping an 18-month high of $ 1.16 on Tuesday before slipping back.
This year’s dollar slide comes after a heady rise for the US currency in 2014 and 2015, with the dollar index topping the 100 mark in December in response to the Fed raising rates for the first time in nine years. The expectation of further interest rate increases fuelled bets on mounting dollar strength in 2016.
Yet the first four months of the year have confounded that expectation, driven by the turmoil in January and February, and exacerbated by the Fed’s subsequent caution about global growth prospects and the outlook for the US economy.
Traders now sense that the path of least resistance is for a weaker dollar, according to Marc Chandler, head of currency strategy at Brown Brothers Harriman.
Paraphrasing Lenin, he said: “In a sword fight, if you feel mush, push. And if you feel steel, retreat. Right now dollar bears are feeling mush.”
Data last week showed that US economic growth fell to its slowest pace in two years in the first quarter, and with the Fed prepared to contemplate only two rate rises this year, the market is pricing in only a 16 per cent probability that the first of those would come in June. Investors are only pricing a roughly even chance of one rate increase in all of 2016.
The dollar is being dragged down by US growth performance, said Roger Hallam, chief investor officer in currencies at JPMorgan Asset Management.
“Relative rates of growth have not trended in the dollar’s favour,” he said. “first-quarter GDP growth in the eurozone was above trend, while in the US was below trend. That growth divergence is part of the drivers of currencies at the moment.”
Bets on renewed dollar strength are now at their lowest since June 2014, according to derivatives data from the Chicago Mercantile Exchange.
Yen strength is undermining the BoJ’s battle against deflation, but in the words of FX strategist Simon Derrick at BNY Mellon, “there had to be a loser” out of the Fed’s decision last week to hold to a dovish line at its monthly policy meeting.
However, the sagging dollar, more tranquil financial markets and the likelihood of US growth rebounding raises the possibility that the Fed follows through on its plans to raise interest rates at least twice this year.
Mr Chandler said he expected the dollar to regain its vim later this year, with traders currently missing the broader picture.
“It’s like the three-level chess board in Star Trek, and we’re only looking at one level,” he said. “Even if the Fed doesn’t tighten, the other central banks are still easing. Monetary divergence was the driver of the dollar’s strength and I don’t see that changing.”
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