Why a Weaker Dollar is a Source of Market Strength

The dollar is down. But that is good news for markets

By Richard Barley

The dollar and euro’s relative fortunes have transformed in 2017 as the greenback has declined and the European currency has risen. Photo: philippe huguen/Agence France-Presse/Getty Images

The pendulum has swung a long way in the foreign-exchange market. The dynamism of the dollar at the end of 2016 has given way to enthusiasm for the euro. That shift could yet support appetite for riskier assets such as emerging-market stocks and bonds.

The WSJ Dollar Index has now unwound the boost it got from the election of Donald Trump in November, and is down about 6.5% this year. The greenback’s key counterpart, the euro, is up close to 10% in 2017. Early Tuesday, the euro rose above $1.15 for the first time since May 2016, reaching the top of the range it has been in since the start of 2015 under the influence of monetary-policy divergence between Europe and the U.S.

The transformation in the dollar and euro’s relative fortunes in 2017 has been remarkable. The focus at the start of the year was on the U.S. Federal Reserve and its efforts to raise interest rates; now the European Central Bank has stolen the spotlight as it tacks gently away from ultraloose policy settings.

Hopes for growth were centered on U.S. spending and tax reform under the Trump administration. Instead it is the eurozone that has delivered consistently positive surprises on growth. And it was Europe that was supposed to face political headaches. But it is the U.S. where the challenges are rising, with the collapse of the health-care bill just the latest example.

True, a lot of these factors may now be in the euro-dollar exchange rate. Europe faces a higher bar to provide new positive surprises than the U.S. A further sharp rise in the euro might cause European policy makers to feel the currency is doing the tightening work on its own. Conversely, the risk might yet be that the Fed raises rates more than the market thinks is likely.

But the ramifications of this shift are broad. A weaker dollar should add to the attraction of local-currency emerging-market assets. The Mexican peso, Brazilian real and South African rand have all risen against the dollar in July.

The important thing for risk appetite is the reason for dollar weakness. As long as it reflects other parts of the world, such as the eurozone, faring better than expected relative to the U.S., rather than fears for the U.S. economy in particular, then emerging markets should have continued support. Seen like that, a weaker dollar is a source of strength.

0 comentarios:

Publicar un comentario