Dollar weakness and fears of a pound plunge in a hard Brexit scenario are prompting a growing number of UK traders to buy dollars, with the Federal Reserve and Congress still pondering further stimulus measures.
Dollar Index drops to 2018 levels
The Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.5% on Monday, trading at levels not seen since May 2018. The downside moves are coming ahead of the Federal Reserve’s policy meeting later this week, with many forex traders taking short positions against the USD.
A so-called ‘fiscal cliff’ is looming ahead of US economy policy as earlier stimulus measures agreed by Congress are set to expire at the end of this month. Right now 30m unemployed Americans are facing a reduction of $600/week income reduction, with major consequences for the US economy and corporates.
A sharp dollar sell-off on Monday is being seen by some sterling investors as an opportunity to buy dollars as they are also fearing a sharp plunge in the pound in the event of a no-deal Brexit – which is looking increasingly inevitable. It means getting out of both sterling and dollar assets and selling them against a third currency. Gold is being favoured in some quarters, along with other popular alternatives like CHF and JPY.
The gold price has broken out of a narrow trading range around the $1800 mark on 16 July and is now flirting with all time highs.
The dollar is being weighed down by concerns over the strength of the U.S. economic recovery, the presidential election which creates uncertainty, plus the mounting tensions between Washington and Beijing.
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An estimated $300bn in US Treasuries was unloaded by foreign investors in March and April just as the US government was raising more money to pay for emergency stimulus packages to keep the US economy ticking over. New Treasury issuance has been bought using dollars printed by the Fed. The US central bank has also been busy buying mortgage-backed securities, municipal bonds and corporate bonds.
Sharp traders will have noticed that the Fed’s increase in its balance sheet (bond buying) corresponds rather precisely with the rally in US equities prices, in case you were wondering how the US stock market was magically soaring as coronavirus ravaged the country.
Let’s not forget about Brexit
“Whilst the ‘greenback’ – a robust safe-haven asset in times of turbulence – is down, quite sensibly UK traders are moving in to buy it as a considerable drop in GBP can be expected if the UK crashes out of the EU in December without a deal.
A low pound will help to slash Britons’ purchasing power and lead to a drop in UK living standards. Weaker sterling means imports are more expensive, with rising costs being passed on to consumers.
The drop in sterling is good for UK exports some insist, however around half of the country’s exports rely on imported components. These will become more expensive as the pound falls in value. It is not painting a rosy picture for the UK economy in 2021.
The dollar index edged slightly higher on Tuesday after slumping to a two-year low, but all eyes are now on the outlook from the Fed which may outline a possible move in policy stance.
The dollar is heading towards its worst month in nearly a decade, losing 3.9% in July. Against the current backdrop of a continuing coronavirus spread in the U.S. putting at risk the country’s economic recovery, plus the massive EU fiscal deal, it is likely that the dollar will remain under considerable pressure for some time. Therefore, Brits worried about the fallout of Brexit will increasingly move to take the opportunity to buy dollars.