Macroscope | Best of a bad currency basket sees dollar bulls sitting pretty
The Fed is the only major central bank gearing up for higher rates while most countries battle economic headwinds with a bias for low rates
The US dollar remains well on the road to long-term recovery. It is not just the improving foreign-exchange fundamentals, but also the lack of any better alternative currency plays that keeps pulling in investors into stronger dollar bets.
Signs of better health in the US economy are increasing the odds of a Federal Reserve interest rate rise next month. Business confidence remains upbeat, US capital markets are surging and the relative attractiveness of the US as a safe-haven hedge in an increasingly unsettled world continues to win over global investors.
Over the past year, the dollar has risen more than 20 per cent against a basket of other major currencies as the markets have homed in on the promise of higher US rates ahead. Once the Fed pulls the trigger for rate rises, dollar bulls should have a field day. Solid US employment numbers are tipping the scales for a Fed rate rise next month. July’s non-farm payrolls added an extra 215,000 workers in employment last month with the jobless rate holding steady at a seven-year low of 5.3 per cent. Tightening labour market conditions reinforce the Fed’s case that the US is reaching full employment and the economy is ripe for a rate rise.
The stronger labour market is eclipsing arguments that the US economy is still prone to deflation risks and needs more time for higher inflation and stronger growth to kick in. Interest rate doves point to US wage inflation slowing to its lowest level in 33 years.
Despite the low domestic inflation picture and worries about the international outlook, the Fed’s discomfort with super-soft policy is clear to see and underlines its desire to get interest rates back to higher levels, where monetary policy should have better traction in future.
This shift in favour of higher US rates is making all the difference to dollar bulls. The Fed appears to be the only major central bank clearing the decks for higher rates this year, while most other countries are battling economic headwinds with a bias towards lower rates.
So far this year, 37 central banks around the world have had to cut rates to help bolster recovery prospects, hurting their currencies’ relative appeal to investors in the process.