By Jamie McGeever
ORLANDO, Florida (Reuters) – While the dollar has benefited enormously this year from the tech-led wave of U.S. “exceptionalism” that has lifted American growth, productivity, profits and stock prices, the greenback has also gotten a huge helping hand from its crisis-prone rivals.
Unforeseen political and economic events have drawn investors toward the safety of the dollar throughout the year. Just look at the political chaos that erupted seemingly out of nowhere in South Korea on Tuesday, slamming the won to a two-year low and, at one point, putting it on track for its worst day in eight years.
True, the won may only be the 12th-most traded currency in the world, involved in barely 2% of average daily foreign exchange turnover. But South Korea is Asia’s fourth-largest economy and the wave of volatility that crashed over its FX and equity markets, forcing emergency action from Seoul to maintain financial stability, has darkened the cloud over emerging markets more broadly.
That’s especially true for Asia, where fears of tariffs from the incoming administration of U.S. President-elect Donald Trump have also pushed China’s yuan to its lowest point this year.
It’s safe to say that few analysts on Jan. 1 would have had martial law in South Korea on their 2024 bingo cards. It’s doubtful they had the following either: anemic growth in the euro zone, where economic weakness in Germany and political crisis in France are front and center; China sleepwalking into deflation; Canada’s sluggish growth prompting the deepest interest rate cuts in the G7; Japan’s yen slumping to its weakest point in 33 years; and fiscal fears slamming Brazil’s real to a record low.
Many observers will argue that it has forever been thus in the foreign exchange market, a zero-sum arena where prices are always relative. But this year has been especially kind to the dollar because of the idiosyncratic political issues and economic weakness that have blighted developed and key emerging market currencies.
UNPRECEDENTED TAILWINDS
The old FX market maxim that the dollar is the “cleanest dirty shirt” in the currency laundry basket has been borne out by events over the last year.
Consider that the dollar index, a measure of the greenback’s value against its G10 peers, is up only 5% this year, even as the U.S. has been tightening its stranglehold over world equities like never before. Foreigners have plowed record amounts into U.S. stocks this year, and U.S. investors have stayed at home en masse.
What’s more, the Federal Reserve has taken a much more cautious approach to cutting interest rates than the market had anticipated a year ago, providing another unexpected tailwind for the dollar.
At the start of this year, rates futures were pricing in around 150 basis points of expected easing from the Fed in 2024. With one policy meeting to go, it’s clear that’s not happening.
Throw in the travails that have blighted the euro zone, Canada and other major economies, and 5% appreciation suddenly doesn’t look all that impressive. Granted, the dollar has risen more against many emerging market currencies, but they are much smaller components of the greenback’s overall value.
Given all of that, one might have expected the greenback to have appreciated more this year than it did.
Looking forward, the question is, can it shine on its own merits next year? Perhaps. It’s certainly difficult right now to envisage how the euro zone, China or any other large economy stages a significant recovery next year that threatens the dollar’s dominance.
But with the dollar hovering around its strongest level in more than 20 years and investors heavily “long,” further appreciation is going to be a much harder slog. Especially if other shirts in the global currency laundry basket scrub up.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(By Jamie McGeever; Editing by Paul Simao)
