The View | Slumping US dollar no longer a one-way bet as volatility returns to currency markets
Nicholas Spiro says while the bears have reason to be confident, a confluence of factors points to a revival of the US dollar’s fortunes. The relative quiet in the currency markets may soon end
The turmoil in global stock markets is intensifying by the day.
Last Friday, US equities suffered one of their sharpest daily declines since an outbreak of volatility swept through markets earlier this year. The Dow Jones Industrial Average, a leading US equity index, dipped back into correction territory, having fallen more than 10 per cent since its peak on January 26.
Yet despite the upheaval in stock markets, one of the world’s largest and most actively traded asset classes, the US$5 trillion-a-day foreign exchange market, has been remarkably unperturbed.
The VIX Index, Wall Street’s “fear gauge” which measures the anticipated volatility in the benchmark S&P 500 equity index, has surged since late January and currently stands close to its level during the panic sparked by the surprise devaluation of the renminbi in August 2015. Meanwhile, the JPMorgan Global FX Volatility Index, a benchmark for implied volatility across currency markets, has fallen since mid-February and has just experienced its third successive weekly decline.
The dollar could also gain from the threat of a trade war between the US and China
In a note published on Friday, JPMorgan rightly observed that currency markets, which are influenced mainly by developments in monetary policy, “have been sidelined and [have been] something of a sideshow to developments in other markets in recent months”.