Pause expected in the rally of the dollar
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MAJOR central banks went their separate ways in the past year.
The US Federal Reserve completely wound down its quantitative easing (QE) programme in October in light of improvements in employment and the property market, while the rest of the world stepped up monetary support to prop up weak economies and to stem deflation.
The Bank of Japan expanded its bond-purchase programme in October. The European Central Bank followed suit with its own version of QE last month. As monetary policies diverged, the US dollar rose 15 per cent against a basket of currencies over the past year. In the long run, I think the greenback is still on its way up, but a few months from now the rally could come to a halt.
The strength of the US economy, which has propped up the dollar in the past, might have already peaked. Last month’s Purchasing Managers Index data suggest that the US manufacturing sector grew at the slowest pace since January 2014, while the euro zone’s PMI rose to the highest level since July. The improvement in the euro zone’s economy will attract fund flows into the common European currency, which will weigh on the dollar exchange rate.
The expectation of an increase in the US federal funds rate midyear is also one of the driving factors behind the dollar’s strength. However, the recent string of weak economic data in the United States could delay the timing of the rate hike, which would also be negative for the dollar.
A pause in the dollar rally as well as expectations of a delay in the US rate increase could prove supportive for the US stock market. A weaker dollar — or at least a pause in its rally — could help improve the portion of earnings generated outside of the country and put an end to negative earning revisions.
Gold will also benefit from the dollar’s decline and the uncertainties surrounding negotiations on the Greek debt, which are expected to peak at the end of this month.
Investment demand also saw an encouraging sign as ETF (exchange-traded funds) holdings increased at the quickest pace since October 2012. But a rise in the gold price could prove short-lived as concerns over the US interest-rate increase could return in the second half of the year.
Komsorn Prakobphol is head of the strategy unit at Tisco Wealth. He can be reached via www.tiscowealth.com or [email protected].
