Opinion | The US dollar may have had a bumpy 2019 but don’t expect it to simply go downhill from here

The movement of the US dollar was tied to market expectations of the US-China trade war and the Federal Reserve’s liquidity provisions and interest rate policy

With few better alternatives for investors, the greenback is unlikely to decline broadly in 2020

Reading Time:3 minutes

Currency dealers monitor exchange rates in a trading room at KEB Hana Bank in Seoul on August 6, 2019. The Chinese currency steadied that day, after it had weakened against the dollar, sending markets into freefall and leading the US to formally designate China a “currency manipulator”. Photo: AFP

Published: 10:30pm, 7 Jan 2020Updated: 5:53am, 8 Jan 2020

The US dollar broadly struggled on the currency markets in late 2019. Many feel it could weaken further in 2020. But the idea that the greenback just heads lower over the coming 12 months may prove too simplistic. The currency markets are rarely straightforward.

A glance back at some of the drivers of late-2019 dollar weakness may prove instructive.

A surge in US cash rates in September elicited an effective response from the Federal Reserve in the form of liquidity provision, pushing down the short-term cost of borrowing US dollars and soothing jangled market nerves. The Fed’s efforts in this regard continued through the rest of 2019 and over the turn of the year when liquidity considerations in the money markets are always matters of huge importance.

With market participants becoming confident the Fed was going to ensure ample US dollar liquidity at an affordable rate, a pillar of support for the greenback on the foreign exchanges arguably eroded. Liquidity provision aside, the Fed also lowered US interest rates in October, its third cut of 2019.

Meanwhile, the mood music in the US-China trade war became more upbeat, with news in December of a breakthrough in negotiations being followed, on New Year’s Eve, by a tweet from US President Donald Trump announcing that he would be signing a “very large and comprehensive Phase One Trade Deal with China on January 15”.

Given the global importance of the US-China trade relationship, it was only natural that markets responded to emerging signs of an initial settlement just as they had earlier reacted to the deterioration in relations.