Too much is being read into the greenback’s recent weakening against the euroThe dollar is in freefall! The global greenback is doomed! screamed recent headlines. Actually, such sensational headlines are “too sensational”, to echo that noted authority on currencies, Miss Prism, in Oscar Wilde’s The Importance of Being Earnest.The dollar’s fall in July to a two-year low against the euro was the immediate impetus for these stories. In fact, the dollar’s recent slide is one in a series of readily explicable fluctuations. When the Covid-19 pandemic went global in March, the dollar strengthened on the back of safe-haven flows into US Treasuries, as it does at the start of every crisis. By May, the Federal Reserve, acting as global lender of last resort, had accommodated this mad scramble for dollars by pouring buckets of liquidity into financial markets and the greenback gave back its early gains. Continue reading...
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In the short term, probably not, but with China weaponising the yuan stern challenges lie aheadThe...In the short term, probably not, but with China weaponising the yuan stern challenges lie aheadThe recent sharp depreciation of the US dollar has led to concerns that it may lose its role as the main global reserve currency. After all, in addition to the Federal Reserve’s aggressive monetary easing – which threatens to debase the world’s key fiat currency even further – gold prices and inflation expectations have also been rising.But, to paraphrase Mark Twain, reports of the dollar’s early demise are greatly exaggerated. The greenback’s recent weakness is driven by shorter-term cyclical factors. In the long run, the situation is more complicated: the dollar has both strengths and weaknesses that may or may not undermine its global position over time. Continue reading...
Hedge funds are reportedly shorting the dollar as fears rise over its status as the world's number one currency
Hedge funds are net short against the dollar for the first since May 2018 amid extreme...Hedge funds are net short against the dollar for the first since May 2018 amid extreme weakness, Bloomberg reported Monday. The greenback has fallen about 6% against the euro alone since the start of the year. Big government and central bank spending has pushed interest rates down and weakened the dollar. Visit Business Insider's homepage for more stories. Hedge funds are shorting the dollar and are bearish on the greenback for the first time since May 2018 in the latest sign that the world's top reserve currency is declining further and unlikely to bounce back any time soon. Bloomberg reported Monday, citing data from the Commodity Futures Trading Commission, that net futures and forward positions held by leveraged funds against eight currencies not including the dollar, fell to negative 7,881 contracts last week. That means that more investors are betting against the dollar than on it right now. Bloomberg said the shorting spree was driven by bullish bets on the euro. The euro has outperformed the dollar by 6% since the start of the year. Currently the euro is roughly worth $1.18. The dollar has been weakening since the peak of the COVID-19 crisis The revelation comes after months of dollar weakness. The bearishness has partly been attributed to the Fed's massive coronavirus stimulus programmes. Read More: Joe Biden officially accepts the Democratic nomination this week. RBC says buy these 47 stocks spanning every industry that are poised to crush the market if he wins in a wave election. Expansionary monetary and fiscal policy tends to drive down bond yields, and lower interest rates. A lower interest rate makes saving in US dollars less attractive. While investors initially flocked to safe havens such as the dollar at the start of the coronavirus pandemic, this has dissipated in recent months. The Dollar Index has fallen 9% since March and as of Monday is trading at around 93.05. The dollar weakness is said to be another key reason why investors have piled into gold. A weaker dollar means they can purchase larger quantities of the precious metal more cheaply. Read More: A Wall Street investment chief says the relentless surge in big tech stocks is headed for an abrupt ending — and warns it could sink the entire market by 40% Looking ahead traders and policymakers anticipate the policy rate to not change until earliest the end of 2021 and Bloomberg economists expect an uptick in inflation at the start of next year. Dollar weakness has caught market participants off guard across both sides of the Atlantic. Win Thin, global head of markets strategy at Brown Brothers Harriman warned last week "the stars are aligned against" the world's top reserve currency. Thin said US' handling of the coronavirus pandemic has had a drag on investor confidence in the dollar. "This is one of the rare occasions when Europe will actually outperform the US," the strategist said in a CNBC "Trading Nation" interview. "Join the conversation about this story » NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid
The dollar's strength in 2020 will likely 'amplify' the negative impact of the coronavirus on global trade, the IMF warns
The IMF said in a report Monday that the US dollar's appreciation against many emerging markets...The IMF said in a report Monday that the US dollar's appreciation against many emerging markets in recent months may not necessarily increase demand for those countries' exports. Many countries exports are priced in US dollars, including oil. The IMF said: "There is growing evidence that most of global trade is invoiced in a few currencies, most notably the US dollar." "The global strengthening of the US dollars ... is likely to amplify the short-term fall in global trade and economic activity," the IMF said. Visit Business Insider's homepage for more stories. The dollar's recent strength role may actually prevent emerging markets from experiencing higher demand for their exports as many of their them are priced in dollars, the IMF said Monday. In a note called "Dominant Currencies and External Judgement" the IMF noted that the dollar's dominance as a global currency can impact the way global trade works, and could make a global economic recovery from the coronavirus pandemic even more difficult. "The prevalence of dominant currencies like the US dollar in firms' pricing decisions alters how trade flows respond to exchange rates," the report noted. "The dominance of the US dollar in trade and finance is likely to amplify the impact of the COVID crisis," the report's authors said. Normally when the dollar depreciates against other currencies, it makes it cheaper for the US to buy goods dominated in other currencies that are facing the weakness. The dollar has appreciated against many emerging market currencies during the pandemic, raising hopes that this will make the exports of the countries whose currencies have depreciated more attractive. For example, the US dollar has appreciated almost 5% against the Indian Rupee since the start of the year. One dollar is currently worth 74.75 INR. But the dollar is also the world's most commonly used currency, and the world's top reserve currency, meaning that any depreciation is unlikely to boost demand for emerging market exports, the IMF said. The introduction of euro "initially reduced" the dominance of the US dollar, but the greenback has undoubtedly remained the world's most traded currency, it added. Dominant Currency Pricing The IMF noted: "There is growing evidence that most of global trade is invoiced in a few currencies, most notably the US dollar—a feature dubbed Dominant Currency Pricing or Dominant Currency Paradigm." "The share of US dollar trade invoicing across countries far exceeds their share of trade with the US. This is especially true in [emerging markets and developed economies] and, given their growing role in the global economy, increasingly relevant for the international monetary system," the IMF said. This means if export prices are set in US dollars or euros, a country's depreciation doesn't necessarily make the goods and services cheaper for foreign buyers, "creating little incentive to increase demand," the IMF explained. The prevalence of dominant currency pricing means the boost to the domestic economy facing the depreciation can be short-lived. Read More: BANK OF AMERICA: Buy these 9 stocks poised to crush the market in any market environment as they spend heavily on innovation One key example of this is petrodollars, where an oil exporting country is paid US dollars by the buyers of its oil. Read More: Leka Devatha quit a cushy corporate career to start flipping houses. She breaks down how she made $1 million on a single deal by supercharging a simple strategy. The petrodollar has been in place since the mid-1970s when prices rose to record levels. It was invented to help keep oil prices stable. It initially just included countries from the Middle East, but has been extended to members of the Organization of the Petroleum Exporting Countries and other countries over the past few years. An appreciation of the dollar against other countries' currencies also means that the depreciating countries' currencies will find it harder to buy US imports, reducing purchasing power. The IMF concluded: "The global strengthening of the US dollar—which mainly reflects a flight to safe haven assets—is likely to amplify the short-term fall in global trade and economic activity, as both higher domestic prices of traded goods and services and negative balance sheet effects on importing firms, lead to lower import demand among countries other than the United States."Join the conversation about this story » NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid