A Fistful of Dollars….

by Alexander Beard, on May 10, 2019 12:36:27 PM

Clint Eastwood fans are no doubt groaning because I am about to use his film titles in an effort to make currency questions an interesting read!  I apologise in advance. 

The power of the US Dollar to influence the rest of the world has been demonstrated over the last few months.  The prices of global shares mirrored the mixed fortunes of the S&P500, and when the Federal Reserve signalled no further interest rate hikes the recent rise of the US Dollar was halted and other currencies finally had a chance to catch up.

As the US Dollar strengthened, and stock markets rallied following the Autumnal falls of 2018, US investors have had their own “Million Dollar Baby” with a double bubble of rising share prices and a strong greenback. 

But what about the rest of the world?  Is it still running “The Guantlet”?

At national level, many countries hold a good “Fistful of Dollars” as reserves to manage through the bad times.  This global demand for the dollar from some of the biggest purchasers props up the dollar, even if countries are seeking to diversify through other currencies in an effort to reduce US influence.  The Euro, Yuan and Yen are the main alternatives.

This makes the US dollar more of a global currency.  It means that much of international borrowing and the prices of many essential resources are in US Dollars.  Countries that owe dollars and import energy and materials have been walking a difficult “Tightrope” lately since it all became more expensive.  This in part explains why Emerging Markets have had such a difficult time (“The Bad”), and also why they are rebounding since interest rates in the US were put on hold (“The Good”).  The swings in the fortunes of Emerging Market share prices have been further exacerbated by the US / China trade wars (“The Ugly”).  This is despite the fact that the economic data for many Emerging Markets has been rather good.

If the EU could establish greater political stability the Euro could challenge the greenback’s “Absolute Power”.  In some respects, Europe may be the place to watch in the next few years.  Of particular note, when comparing to the US stock market, the EU has significantly less tech companies.  If the EU could develop more of its own “Space Cowboys” and boos the Euro’s global standing we may see attractive returns.

I suppose that the good news is that here in the UK, Brexit has little or nothing to do with the US Dollar.  The political discussions with the EU are “Every Which Way but Loose” and it could be some time before any meaningful negotiations are made on trade with the US.  Things may eventually turn out well, the question is, are you feeling lucky?

Andrew Moore