More Red From the Greenback?

Market Blog
October 24, 2019

The U.S. dollar, also known as the greenback, is heading for its biggest monthly loss since January 2018, and we could be due for a more prolonged period of weakness after more than 10 years of strength.

As shown in the LPL Chart of the Day, the recent drop has brought the U.S. Dollar Index down to the 200-day moving average near 97.5. If the dollar breaks below that level, we could see another 1–2% of downside, possibly down to summertime lows.

usd-decline-continue

“Sentiment on the dollar had become overly optimistic this summer,” said LPL Financial Senior Market Strategist Ryan Detrick. “From a contrarian point of view, it makes sense to think that recent weakness could continue.”

The gap between U.S. and global interest rates has driven the dollar higher over the past several years. The dollar has risen throughout much of the current economic expansion amid the Federal Reserve’s (Fed) rate hike campaign, which was paused at the beginning of this year.

While a rallying dollar reflects a strengthening domestic economy and aids consumer purchasing power by making U.S. imports less expensive, it has been a negative development for global economies. The strong dollar has made U.S. exports more expensive for international consumers and curbed capital flows to other economies, putting more pressure on a stressed global economy. The strong dollar has also been a drag on international stock returns, so for investors with globally diversified portfolios, a possible reversal in that trend could be welcomed.

The gap between U.S. interest rates and international interest rates is still wide. However, the Fed’s recent rate cuts have helped temper the dollar’s rally. Market odds that the Fed will cut rates at its October 30 meeting have risen from 40% to over 90%, implying that we could see the third rate cut of this cycle soon.

We also expect further progress resolving the U.S.-China trade dispute to weigh on the dollar, while recent stabilizing of global growth and U.K. progress toward its “Brexit” from the European Union may attract more interest in European currencies. Longer term, the U.S. trade and budget deficits could also put downward pressure on the dollar.

We would view further dollar weakness as a reflection of better global growth and an improved global trade environment, clearly positive developments. But don’t expect a collapse. The greenback remains the world’s reserve currency and will likely remain so for decades to come. The U.S. economy remains the biggest and most productive in the world, making it a very attractive destination for international investment dollars.

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This Research material was prepared by LPL Financial, LLC.

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