Amid a dearth of news, the dollar continues to be the story.
The greenback headed for a third daily decline Monday, as Bloomberg’s gauge looks poised to close 2019 lower. The euro rose a fourth day to the strongest since August 13.
There’s not a whole lot to say about this. Markets are expecting the consummation of the interim trade deal between the US and China, and funds are trimming longs into quarter- and year-end. It’s good news for EM, that’s for sure. Both equities and FX have pushed to the best levels since summer of 2018, when Jerome Powell was hard at work tightening the world into a slowdown (we jest, but only kind of).
“Emerging markets may grow faster than developed markets and the US in particular, signaling the end of the strong US dollar cycle”, Delphine Arrighi (a PM at Merian Global Investors UK Ltd. in London), wrote in a note, adding that “although the big move in rates seems largely done, the value next year should come from the long-awaited recovery in EM local currencies”.
Some of this is just idle holiday musing, but don’t let it be lost on you that generally speaking, a weaker dollar is good news to the extent it means easier financial conditions and looser liquidity – i.e., the opposite of what unfolded in 2018. Consider this brief passage from BNP’s year-ahead EM outlook, for example:
We expect USD liquidity to affect credit risk premium and the real economy in EMs. Globally, this liquidity also affects: (1) the financial cost of value chains, (2) the willingness of banks to roll over FX hedges, and (3) growth via long-term fixed-asset investment and consumption: growth is essential when social demands and income inequality pose risks in fiscally responsible countries. In this regard we expect the liquidity injection announcement from the Federal Reserve and its impact on excess reserves to support EM currencies. Moreover, the expansion of balance sheets has previously been associated with a more stable xccy basis, which means a better risk/reward profile for EM assets.
There’s little utility in delving too far into the weeds on this on a Monday kicking off (another) holiday-shortened week, but you get the idea – a stronger dollar is an annoyance/hinderance for lots of people, not just Donald Trump and his MAGA agenda.
“An end of year soggy dollar is the main market feature, talking Bloomberg’s dollar index below the level at which it started 2019 [and there’s] no good reason other than positioning methinks”, SocGen’s Kit Juckes wrote this morning, calling it a “reminder that the world’s a nicer place when the dollar’s on the back foot”.
Read more: Is ‘King Dollar’ Finally Rolling Over?