By Jamie McGeever
ORLANDO, Florida (Reuters) – While the dollar has benefited greatly this year from the wave of U.S. “superdependence” that has lifted American growth, productivity, profits and stock prices, the greenback is also had great help from his own. crisis-prone competitors.
Unexpected political and economic events have drawn investors to the safety of the dollar throughout the year Just look at the political uproar that erupted seemingly out of nowhere in South Korea on Tuesday, plunging the economy to a two-year low and, at one point, putting it on the track for the worst day in eight years.
True, the winner may be only the 12th largest trading currency in the world, involved in very little 2% of the average daily turnover of foreign exchange. But South Korea is Asia's fourth largest economy and the wave of volatility that has swept over its FX and equity markets, prompting urgent action from Seoul to maintain financial stability, has darkened the cloud across emerging markets in general.
That is especially true for Asia, where fears of tariffs from the incoming administration of US President Donald Trump have also been pushed to the lowest level this year.
It's safe to say that many analysts on January 1st wouldn't have had martial law in South Korea on their 2024 bingo cards. It is doubtful that they had either: anemic growth in the euro zone, where economic weakness in Germany and political crisis in France are front and center; China sleeps into deflation; Canada's slow growth prompts the deepest interest rate cuts in the G7; Japanese yen falls to weakest level in 33 years; and fiscal fear condemning real Brazil to the lowest level.
Many observers argue that it has always been that way in the foreign exchange market, a zero-sum field where prices are always relative. But this year has been particularly kind to the dollar due to the unusual political issues and economic weakness that have damaged developed and important market currencies.
TAILWIN NOT ISLAND
The former FX market says the dollar is the “cleanest dirty shirt” in the currency laundry basket as evidenced by events over the past year.
Note that the , a measure of the greenback's value against its G10 peers, is up just 5% this year, even as the US has been tightening its grip on global equities as ever was before. Foreigners have plowed record numbers into US stocks this year, while US investors have largely stayed home.
In addition, the Federal Reserve has taken a much more cautious approach to cutting interest rates than the market expected a year ago, providing another unexpected boost for the dollar.
At the start of this year, futures prices were about 150 basis points from an expected easing from the Fed in 2024. With one policy meeting to go, it's clear that's not happening.
Throw in the travesties that have wreaked havoc on the eurozone, Canada and other major economies, and suddenly a 5% estimate doesn't seem so impressive. Granted, the dollar has risen more against many emerging market currencies, but they are much smaller parts of the overall value of the greenback.
With all that, one might have expected the green background to be more appreciated this year than it was.
Looking ahead, the question is, can he shine on his own merits next year? Maybe. It is certainly difficult at the moment to see how the euro zone, China or any other major economy will experience a major recovery next year that threatens the dominance of the dollar.
But with the dollar hovering around its strongest level in more than 20 years and investors very much “long,” further appreciation is going to be a much harder slog. Especially if there are other shirts in the laundry basket of global money scrubbing up.
(The views expressed here are those of the author, a columnist for Reuters.)
(By Jamie McGeever; Editing by Paul Simao)
