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A woman holds up US dollar and Chinese renminbi banknotes in Qionghai, in south China’s Hainan province, on January 7, 2016. Photo: Xinhua
Opinion
Macroscope
by David Brown
Macroscope
by David Brown

As the coronavirus pandemic eases, the US dollar’s fortunes look challenging

  • When the dollar loses its edge, don’t despair – it’s a sign that the global economy is bouncing back
  • The world returning to some sense of normality means Beijing will have to accept a stronger renminbi as the flip side of the dollar losing its lustre
David Brown
David Brown
Why you can trust SCMP

The US dollar can be great barometer for global investors when markets are in turmoil. If the outlook seems uncertain and risk appetite is falling, the dollar offers a solid, safe retreat for investors seeking better protection.

Conversely, when the dollar falls from grace, it’s a good sign that the global economy is bouncing back, financial stability is steadying and capital flows are heading out of the United States into better investment opportunities abroad.

In the past 12 months, since the Covid-19 crisis first struck, the dollar has provided a good benchmark as risk perceptions have ebbed and flowed. This year may prove more challenging for the dollar as the pandemic eases, posing a potential problem for Beijing as stronger demand builds for the renminbi.

In March last year, as the pandemic deepened and global confidence collapsed in the face of lockdowns, factory shutdowns and the threat of world recession, investors sought sanctuary in any safe haven on offer.

Mainstream government bonds rallied, and the dollar surged with its trade-weighted currency index rising by around 8 per cent from the low-point to its peak during March’s volatile trading conditions.

After the market’s initial shock, the dollar index slowly gave ground as global confidence gradually recovered, risk aversion eased and global stock market sentiment found a surer footing.

In the remaining nine months of 2020, the dollar index subsequently lost 13 per cent of its face value as investors shifted into higher yielding markets overseas. Not so much a thumbs down for the dollar than a stronger vote of confidence in world financial markets’ steady recovery.

During that time, there have been plenty of dollar detractors, warning that the US currency’s days were numbered, debased by excessively low interest rates and the Federal Reserve throwing caution to the wind by monetising debt like there was no tomorrow.

The US was not alone, though, as many of its central bank peers were doing exactly the same and perhaps even going a step further by pushing interest rates into negative territory, especially in Europe and Japan.

If there was one stand-out reason for the dip in dollar sentiment as 2020 drew to a close, it was investor concerns about how the US’ toxic political situation would pan out as president Donald Trump threatened he wouldn’t leave the White House without a fight. Investors deserted the dollar in droves.
The event which marked the turnaround in the dollar’s fortunes in early 2021 was Joe Biden’s inauguration as US President on January 20.

04:33

As Biden enters White House, world leaders express ‘relief’ and welcome ‘friend’ and ‘mate’ back

As Biden enters White House, world leaders express ‘relief’ and welcome ‘friend’ and ‘mate’ back

This was the turning point when markets believed the US economy was in safe hands again and back on the road to recovery rather than wrack and ruin.

Biden’s US$1.9 trillion stimulus plan not only offered hope that stronger growth could be restored in the US, but that global recovery would also be boosted in the process.
With Biden in the White House, there is a better chance that the US and China can settle their differences over trade and work towards getting global growth back above the 5 per cent mark in the long run.

How the real cost of any US-China conflict will be felt for years in lost productivity

Once the world transcends the Covid-19 pandemic and global financial confidence consolidates, that’s when the dollar’s outlook becomes even more challenging.

In the short term, traders may be worried about a “third wave” of Covid-19 infections and the spectre of the Fed tightening later this year, but, longer term, global investors remain underinvested and under pressure to make up for lost time.

The US domestic capital repatriations seen in 2020 are more likely to revert into overseas markets, leaving a weaker dollar in its wake this year. US investors diversifying abroad should help lower global risk perceptions.

China should be a major beneficiary of global investors in search of higher yields. As the world returns to normality, Beijing will have to accept a stronger renminbi as the flip side of the dollar losing its lustre.
A stronger renminbi should be less of a problem now, considering Beijing’s apparent policy shift from export-led to domestic-driven growth. While the high-risk mood prevails, a return to 6.25-6.30 for dollar/renminbi could be on the cards fairly soon.

As long as Beijing remains more relaxed about exchange rate volatility, there should be positive spin-offs for the currency. A more laissez-faire approach by Beijing to renminbi management can only win broader global acceptance for the currency in the long run.

David Brown is the chief executive of New View Economics

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