Though currency market volatility is likely to continue, Russ sees the greenback continuing to move higher for these reasons.
The US dollar rallied this year, with the Dollar Index (or DXY) up roughly 8.1% year-to-date, according to Bloomberg data. But the gain hasn’t been steady. Instead, the dollar has been on a rocky ride, as investors have repeatedly re-calibrated their expectations for US growth and the timing of a Federal Reserve (the Fed) rate hike.
Indeed, world currency markets have roared back to life lately after years of hibernation, with a handful of monetary policy surprises—including the European Central Bank (or ECB)’s bigger-than-expected bond-buying program and the Federal Reserve (the Fed)’s delay in raising rates—leading to rising volatility. This begs the question: Where will the dollar go from here?
Market Realist – The greenback has rallied year-to-date for a variety of reasons.
The graph above shows the performance of 23 currencies against the US dollar (UUP) year-to-date (or YTD). The Swiss frank is the only currency on the list that has appreciated against the greenback.
Lower growth expectations in emerging markets (EEM) have caused their currencies to depreciate. Commodity-exporting economies like Brazil (EWZ), South Africa (EZA), Russia (RSX), and even Australia (EWA) have seen their currencies depreciate anywhere from 14% to 30%. The Brazilian real depreciated 29.7% against the US dollar YTD. Commodity-importing economies like India (EPI) and South Korea (EWY) have seen a smaller currency depreciation.
Meanwhile, central bank divergence in the major developed markets (EFA) has led to a stronger dollar against the euro and the yen. Both Japan and Europe are seeing easy monetary policies, while interest rates may rise soon in the United States.
While the Fed might delay the rate hike, it’s likely that rates might rise by the end of the year. Funds usually flow to markets offering higher yields, strengthening their currencies in the process.