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The US dollar weakens against the G10 currencies

Is this the end of an era of strength?

Reading this content will help you understand:

  • The factors contributing to current USD weakness.
  • What to watch if you are looking to trade any of the G10 currencies against USD in the coming months.
  • The potential long-term outlook for the world’s reserve currency.

The US dollar has enjoyed a long run of strong performance as one of the world’s key safe haven currencies, alongside the Japanese yen and the Swiss franc, but that appears to be at an end for now.

Concerned investors had used the currency as a safe haven during what has been an extended period of uncertainty, but this status is currently under threat as we are seeing a weakening of the US dollar at a time when it would usually be expected to strengthen.

US-China trade tensions

The US-China trade war has been rumbling along for two years1and has affected far more countries than just the two superpowers at the heart of the dispute. President Trump’s persistent push to get what he sees as a fairer deal for the US has resulted in the imposition of trade tariffs against Chinese and European goods, with the latest round potentially affecting around US3.1 billion of imports2.

The fallout from this and the COVID-19 pandemic has created a push towards safe havens, which has resulted in the gold price rising to nearly US$2,0003. Yet the traditional safe haven of the US dollar in recent weeks has seen its price weaken rather than strengthen, in what is apparently a direct reversal of what we would expect.

So, what’s happening?

Hamish Muress, Senior Manager OFX, said: “For the US dollar, we’d normally expect to see these levels of high tension translate into US dollar strength. However, investors are very sensitive at the moment to the poor economic data that continues to trickle out of the US.

“Just this month we have seen unemployment claims pick back up above 1.4m which is worse than was expected, while consumer sentiment last week dropped off due to the recent surge in virus cases. Over the last four or so weeks the Dollar Index has dropped from 97+ down to 94. Trade tensions, poor economic data and virus infections are all weighing on the currency.”

The US Federal Reserve did little to bolster the US dollar this week either, as it held rates at between 0% and 0.25% as it has since March when the COVID-19 pandemic really took hold.

This weakening explains to a large extent why the Australian and New Zealand dollar have both more than held their own against the US dollar, despite the clear concerns over the Chinese economy4 and the ramping up of tension between not just the US and China5, but Australia and China too6. The US dollar has fallen by around 9% since March while the Australian dollar has risen by 25% in the same period7.

For example, the Australian dollar broke the US$0.70 barrier on July 20, having hovered close to it for the week prior. This wasn’t short lived either, as it maintained and even extended its position, reaching US$0.7161 on July 28.

A similar story was seen against the pound, as it was at US$1.2649 on July 20 but had pushed higher to US$1.2944 by July 28, again more a feature of the US dollar weakening than the pound strengthening to any great degree. Much the same has happened with other G10 currencies. The euro, for example, has pushed up from US$1.1260 on July 1, to US$1.1748 on July 27 – a move of five cents in around three and a half weeks.

Much of the problem for the US dollar has centred around what has been perceived as a poor response to the COVID-19 outbreak8. As Stephen Bartholomeusz wrote in the Sydney Morning Herald: “In essence, what’s occurring is a loss of faith in the US economy, its political system, its competency and in its commitment to the post-war role it has played in the world’s affairs9.”

In short, there is a real concern that the US dollar’s position as the world’s reserve currency is under more than a short-term threat10.

What happens next?

So, what can we expect to see in relation to the US dollar going forwards? Isaac Figueroa, our OFX Treasury Dealer in Toronto, said: “This week the Federal Reserve chairman Jerome Powell said they don’t see (interest) rates going higher. In the short term, an economic slowdown tends to keep rates very low. It’s not much about Donald Trump at the moment, it’s more about the situation with the economy slowing down in the US, inflation is expected to rise, but at the same time bond yields are falling.

“I believe the US dollar will continue to be weak until around November as it is going to be under pressure because of the election in the US. It may go higher before the election, but it is very difficult to say.”

Stock market performance is also typically associated with currency strength, said Mr Figueroa, making this one area to watch to see which way the US dollar is likely to move. But the US dollar also tends to weaken in an election year11 – the US Presidential election is in November – and slowing economic growth for the remainder of the year is also holding back the US dollar. This isn’t exclusive to the US, but global economic growth is set to suffer thanks to COVID-1912.

The Federal Reserve decision to keep interest rates between 0% and 0.25% for July, coupled with moves to continue to support the liquidity by maintaining its dollar swap lines with other central banks until March next year and extending the facility to swap Treasury Bills for US dollars for international monetary authorities13. The US dollar continued to weaken on the news. It has reached a two-year low in July14.

What to watch

The ongoing COVID-19 crisis in the US and a combination of stalling stock markets and the Presidential election are conspiring to hold the US dollar back and weaken against other G10 currencies. Any future civil unrest in the US have the potential to spark additional concern for anyone trading from US dollars to another currency. But the relative weakness to other G10 currencies means now might be a good time for anyone needing to move money into US dollars to take advantage of its weakness.

The euro is enjoying strength against the USD as fiscal support and COVID-19 containment open the door to a faster paced recovery than what is likely in the US. Should USD weakness continue, the strong long-term prospects for the European Union have led to speculation that the euro could be a contender as the world’s new reserve currency.

If you need guidance on how and when you could make your trade to benefit as much as possible, then get in touch with one of our OFXperts. As we have offices worldwide, you can contact someone in person 24/7

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