Currencies 2Q19: Dollar strength to stay


From half-full to half-empty
Chief Investment Office23 May 2019
Photo credit: AFP Photo


The Fed’s patient hike stance has not derailed the US dollar’s uptrend; the DXY could still rise toward 100 this year. US interest rates have risen above the Federal Reserve’s 2% inflation target but real interest rates are negative across other major currencies: the euro, the Japanese yen, and the British pound – which make up the DXY. None of these central banks will be looking to deliver a rate hike before end-2020. While the US economic outlook is no longer as robust, it has not been downgraded as severely as its G-3 peers. Barring further hocks to the global economy, the Fed is still the only central bank with room to raise interest rates next year.

The euro and the pound are caught between substandard growth and hard politics. The official 2019 growth forecasts for the Eurozone and the United Kingdom have been downgraded to .1% (vs 1.7% previously) and 1.2% (vs 1.7% previously), levels not seen since 2013 and 2009, respectively. Recession risks cannot be discounted if Britain exits the EU without a deal on 12 April. Many central banks are wary of the possible economic/financial disruptions from an unprecedented, disorderly Brexit. The unity of the remaining 27 nations in bloc will be tested if the far-right parties increase representation at the European Parliament elections on 23-26 May. With inflation below their 2% targets, the ECB and the BOE are no longer thinking about normalising monetary policy – instead, it is about contigency plans on a no-deal Brexit.

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