Oliver Mangan: US election could be adding to uncertainty around the dollar
There has been a fair bit of debate recently about whether the dollar has entered a long-term decline now that the US Federal Reserve has cut rates to effectively zero.
The currency lost about 7.5% over the summer against the other major currencies, on a trade-weighted basis.
In reality, though, this has just seen the US currency has merely returned to 2018 levels.
Indeed, the dollar is still comfortably above the trading levels evident in the earlier part of that year.
There is a bigger picture: The dollar appreciated very sharply over the second half of 2014 and in the early part of 2015 and has remained at these elevated levels over the past five years.
What has been remarkable is it has traded in very tight ranges against the other major currencies over this period.
Against the euro, the dollar has been largely confined to a $1.05-1.20 band since the end of 2014.
Even against a volatile sterling, $1.20- 1.40 has contained nearly all the action in the so-called cable rate since the sharp fall of the UK currency in the aftermath of the June 2016 Brexit referendum.
Meanwhile, although they have regained some ground in recent months, emerging market currencies remain well down on their levels of a year ago against the dollar.
Indeed, the dollar is about 6.5% higher in trade-weighted terms against these currencies than at the start of 2020.
Falling commodity prices, weakness in trade flows and a flight to quality as a result of the Covid-19 pandemic has seen emerging market currencies lose considerable ground against the major currencies in 2020.
It is important to bear this in mind when talking about the value of the dollar, however.
In overall trade-weighted terms, the US currency has climbed to even higher levels this year.
Nevertheless, it is fair to point out that the dollar has lost ground over the summer.
Currency movements can be difficult to explain.
The US economy has outperformed to date in the Covid-19 pandemic, with a smaller decline in GDP during the first half of 2020 compared to Europe, largely due to the fact that the lockdowns in the US were of shorter duration and not as prevalent.
However, markets may be becoming concerned that the resurgence of the virus in the third quarter in the US and continuing marked rise in the number of deaths, especially compared to Europe.
That may impede the US economy’s recovery and prompt even more fiscal and monetary easing.
The extensive dollar swaps lines put in place by the Fed with other central banks may also be contributing to the recent weakening of the currency.
The large US rate cuts have not helped either.
The upcoming US presidential election could also be adding to uncertainty around the dollar, with a significant regime change quite possible in Washington next year.
For now, though, it is too early to conclude that the dollar has entered a so-called secular decline.
Indeed, renewed volatility in markets could see the gains made by numerous currencies against the dollar over the summer quickly unwind.
A key exchange rate is against the euro.
The $1.20 and then $1.25 levels are formidable obstacles for the single currency to overcome as they are strong technical support points for the US currency.
It may be that the major currency pairs continue to trade within well-defined ranges, certainly until the world economy shakes off the yolk of the Covid-19 pandemic.
Then we will have a clearer picture of what the political and policy landscape will look like in the US in the coming years.