The ensuing US monetary policy and public health response to the COVID-19 pandemic are key reasons to believe March will mark the climax of the US dollar's multi-year run, with further weakness to come.
A stampede to safety in financial markets fueled by the spread of the COVID-19 pandemic propelled the real value of the trade-weighted US dollar to its highest in over a decade in March, reaching levels not seen since 2002.
According to Brown, two pillars of the dollar’s strength – a superior growth outlook and substantial yield premium – have significantly eroded, while the promise of rising political uncertainty threatens to amplify USD headwinds over the tactical investment horizon.
“The disappearance of crisis conditions across markets, onset of an early cycle environment, corrosion of the forces that precipitated the multi-year advance in the dollar, and impending increase in US political uncertainty add up to a compelling case that the reversal in the world’s reserve currency has more room to run.”
Highlights from the report:
• The rotation from severe financial stress and recession to economic expansion has profound implications for foreign exchange markets.
• An early cycle environment is typically associated with US dollar weakness that would play out over at least the coming months.
• Poor US health outcomes relative to peers and the scale of the monetary policy response are eroding the key pillars of the prior bull run: superior relative growth and much higher interest rates.
• The US election should soon assume more prominence as a driver of financial markets, with rising political uncertainty and potential policy changes likely to be negative for the dollar.
• Our call for tactical dollar weakness informs relative value opportunities not only in foreign exchange, but also equities and fixed income.
• Dollar pessimism is tempered by elevated global economic uncertainty and countervailing forces that could limit the magnitude and length of any downdraft.