Dollar Gets Squeezed From All Sides
Greenback is down 5.6% this year, its worst two-quarter decline since 2011, as investors see more growth overseas.
By Chelsey Dulaney
The Wall Street Journal
July 3, 2017
The dollar suffered through its worst stretch in six years during the first half of 2017, as investors turned more confident that economic recoveries around the world are gaining on or surpassing growth in the U.S.
The currency lost 1% last week against a basket of major peers tracked by The Wall Street Journal, bringing its decline for the year to 5.6%. That is the dollar’s largest two-quarter percentage decline since 2011.
The dollar has come under fresh pressure after central-bank officials in Europe and Canada last week offered some of their strongest signals yet that they could soon begin winding down monetary policy measures designed to spur economic growth.
Investors, viewing these statements as a sign of strength and a possible portent of higher interest rates in those countries, rushed to buy the currencies. The euro soared to its highest level against the dollar in more than a year, while sterling and the Canadian dollar both rallied more than 2%.
The developments marked the latest bad news for the dollar, now the worst-performing of the major currencies this year.
Few had expected such a turnabout even six months ago. Investors had driven the dollar to a 14-year-high after the November U.S. presidential election on hopes that Donald Trump’s plans for a tax overhaul, deregulation and fiscal stimulus would accelerate growth while the Federal Reserve also raised interest rates.
Instead, the Trump administration’s plans have repeatedly hit political roadblocks while U.S. growth, employment and inflation data have begun to soften.
Even the Federal Reserve continuing to raise U.S. interest rates—one of the few positives for the dollar this year—is no sure thing. Some Fed officials recently have expressed concern about pushing up rates amid weakening inflation. The latest was Federal Reserve Bank of St. Louis President James Bullard, who said on Thursday that he doesn’t support raising short-term interest rates again this year.
“I think we have been overly hawkish, especially with regard to our future plans,” he told reporters during a London presentation.
The dollar suffered through its worst stretch in six years during the first half of 2017, as investors turned more confident that economic recoveries around the world are gaining on or surpassing growth in the U.S.
The currency lost 1% last week against a basket of major peers tracked by The Wall Street Journal, bringing its decline for the year to 5.6%. That is the dollar’s largest two-quarter percentage decline since 2011.
The dollar has come under fresh pressure after central-bank officials in Europe and Canada last week offered some of their strongest signals yet that they could soon begin winding down monetary policy measures designed to spur economic growth.
Investors, viewing these statements as a sign of strength and a possible portent of higher interest rates in those countries, rushed to buy the currencies. The euro soared to its highest level against the dollar in more than a year, while sterling and the Canadian dollar both rallied more than 2%.
The developments marked the latest bad news for the dollar, now the worst-performing of the major currencies this year.
Few had expected such a turnabout even six months ago. Investors had driven the dollar to a 14-year-high after the November U.S. presidential election on hopes that Donald Trump’s plans for a tax overhaul, deregulation and fiscal stimulus would accelerate growth while the Federal Reserve also raised interest rates.
Instead, the Trump administration’s plans have repeatedly hit political roadblocks while U.S. growth, employment and inflation data have begun to soften.
Even the Federal Reserve continuing to raise U.S. interest rates—one of the few positives for the dollar this year—is no sure thing. Some Fed officials recently have expressed concern about pushing up rates amid weakening inflation. The latest was Federal Reserve Bank of St. Louis President James Bullard, who said on Thursday that he doesn’t support raising short-term interest rates again this year.
“I think we have been overly hawkish, especially with regard to our future plans,” he told reporters during a London presentation.
Markets are pricing in a roughly 54% chance that the Fed sticks to its projection for at least one more rate increase in 2017, according to fed-funds futures contracts tracked by CME Group . That is down from 62% in March.
Meanwhile, investors are growing more bullish about economic recoveries in Europe and parts of the developing world, even as they fear a U.S. slowdown.
After years in which the U.S. economy outpaced growth in the eurozone, the 19-country currency bloc pulled ahead last year, and recent forecasts have its growth essentially even with that of the U.S. this year and next.
Emerging-market economies are expected to expand at the even faster rate of 4.7% this year, more than double the pace of U.S. and Europe, according to J.P. Morgan .
“The rest of the world’s tone is improving while the U.S. is decelerating, and the dollar is reflecting that,” said Mark McCormick, North American head of foreign-exchange strategy at TD Securities.
Some investors believe the dollar’s performance this year could spell the end for the bull market in the greenback. Periods of dollar strength have typically lasted for around seven years.
“We’re at this pivotal moment now where we’re in the midst of a major turn lower in the dollar,” said Bilal Hafeez, head of foreign-exchange strategy for Nomura Securities in London.
Alessio de Longis, a portfolio manager at OppenheimerFunds, entered the year betting on a broadly stronger dollar but now expects the dollar to trade sideways this year.
“The growth momentum in the U.S. is fading,” Mr. de Longis said. “Without a reinvigoration of tax reform, which doesn’t seem likely this year, the dollar bull market is probably over.”
Hedge funds and other speculative investors built up more than $28 billion in bullish bets on the dollar at the end of last year, according to Commodity Futures Trading Commission data. As of June 27, bullish bets on the dollar had shrunk to a net $2.7 billion.
Not everyone has lost confidence in a strong dollar: James Athey, a senior investment manager at Aberdeen Asset Management , still expects the dollar to rise against developed-market currencies such as the yen in the months ahead.
“The dollar has suffered greatly,” said Mr. Athey, who thinks dollar investors are too pessimistic about the Fed’s interest-rate path.
“We think the U.S. economy is still the most robust,” he added.
A weaker U.S. currency could help support the recent recovery in corporate profits, which grew at the fastest pace in nearly six years in the first quarter of the year. A falling dollar makes U.S. multinationals’ exports more competitive abroad.
A weaker dollar also would relieve pressure on emerging-market nations by making their dollar-denominated debts easier to service and relieving downward pressure on their currencies. Since many developing countries are also commodities producers, a weaker dollar helps these economies because it makes their materials cheaper for nondollar buyers.
Even in Europe, where exports to the U.S. have become more expensive as a result of the euro’s 8.6% rise against the dollar this year, signs of growth slowly picking up could mean European companies are better able to withstand a weakening dollar than in previous years. The benchmark Stoxx Europe 600 index has rallied 5% this year.
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