THE DOLLAR´S CURIOUS CALM IN THE MARKET STORM / THE WALL STREET JOURNAL

The Dollar’s Curious Calm in the Market Storm

With stocks swinging to and fro, why is the foreign-exchange market so calm?

By Richard Barley



DOLLAR DOWNER
ICE U.S. dollar index 

 Source: FactSet



Stocks have swung violently amid rising trade tensions and a modest cooling of the outlook for global growth. The dollar has made an equally important statement by doing not much at all.

The dollar fell in January, continuing 2017’s decline, but that trend broke as turbulence hit markets. Since then it has moved sideways: against the euro it is stuck around $1.23.


Brighter economic prospects outside the U.S. pushed the dollar lower last year against the euro and emerging-market currencies; the eurozone recorded its best growth for a decade. But now eurozone data, led by surveys like the Markit purchasing managers index, has lost steam, while U.S. data has been better behaved.


WINNERS AND LOSERS
Change against U.S. dollar since start of 2018

Source: FactSet


Data from the U.S. Commodity Futures Trading Commission suggests investors have pared back bearish bets on the dollar, but are still looking for it to fall. That will require a catalyst, although none seems to be imminent. Unlike stocks, which after a huge rally in 2017 were highly valued, the dollar has already moved a long way, with the ICE U.S. dollar index falling nearly 10%.

The dollar’s decline was likely slowed by the prospect of stimulus from tax and spending measures to support it, even if there are longer-term worries about the merits of stimulus so late in the economic cycle. The U.S. economy could get a bump while the eurozone is more exposed to global fortunes. Steadily rising interest rates could boost the dollar as well.

A broadly rising dollar would be a worrying development for emerging-market stocks and bonds, among the few bright spots for investors this year. Appreciating currencies have acted as an additional lure, boosting returns. But the rally against the dollar has stalled and some currencies like the Russian ruble and Turkish lira are being hit hard by political and economic problems of their own making.

The dollar’s sideways motion suggests there is a lack of conviction on what happens next for the global economy. That in itself, after the dollar’s sustained decline of 2017, is a signal. The dollar may just be pausing, but its lack of movement can’t be taken for granted.