The forecasts of less aggressive behavior by the Federal Reserve in its process of cutting interest rates is marking the evolution of the stock markets in recent sessions. The best example of this is the progress of the US dollar, appreciating nearly 4% from the lows marked at the end of last month. This is evidenced by the development of the Dollar Index, which records the evolution of the greenback against a weighted basket of the world’s most traded currencies.
And also, more particularly the euro/dollar, which has registered a 3.5% decline in the last 19 sessions given the strength of the US currency.
“The US dollar has strengthened considerably in the first half of October. To a large extent, the currency’s strength reflects better-than-expected macroeconomic data. Several labor market indicators have improved, as has activity in the service sector. This has led to a considerable revaluation of rate expectations in the US, with markets withdrawing more than one rate cut until the end of this year,” explains Claudio Wewel, currency strategist at J. Safra Sarasin Sustainable AM.
“Many factors continue to support the preeminence of the dollar,” they say from Jupiter AM, while arguing that the US economy is the most powerful in the world and, larger than that of China and Japan combined, second and third by GDP.
“It has a stable financial system characterized by the independence of institutions such as its central bank, as well as a relatively open economy. About 60% of international reserves are held in dollar-denominated assets. In addition, the dollar is the most traded currency and plays a crucial role in global trade as well as debt markets,” they generalize.
However, this marked movement of the dollar is not causing the pair to set new highs or lows for the year, which will register in 2024 – despite everything – the smallest range of movement in its history. That is to say, The difference between the highest and lowest levels that the pair has marked this year is the smallest in history.
In fact, even with the renewed strength of the greenback in the last four weeks, the range of movement of the pair has remained this year between the 1.19 it marked in August and 1.069 in April, which means that between both levels There is barely 5% of the way (see graph).
This is the lowest percentage in history after the one marked in 2019 (from 1.157 to 1.0879, 6.35%) and that of 2023, the year in which the distance between maximums and minimums of the pair was around 9%.
All this in a year in which the annual balance of the exchange between both currencies reflects a decrease of 2.3%, thus adding its third year of decreases in the last four.
“In the short term we see room for a rebound in the dollar, since expectations of Federal Reserve rate cuts and a recession in the US seem exaggerated, in our opinion,” Ebury experts pointed out just a few weeks ago.
“Arguably the key risk event for the common currency this week will be the release of October business activity PMI figures for the euro zone on Thursday,” he explains. Matthew Ryan, head of market strategy at the global investment firm financial services Ebury. The market consensus points to another reading below 50 in the composite index (49.7), which would result in an absolute contraction.
“Another downside surprise here would be a big blow to the euro. Lagarde noted that the bloc’s latest inflation figures had been relatively reassuring, and that she hopes a return to target could be on the cards sooner than expected. All in all case, this has solidified the market view that the consecutive cuts are here to stay for the time being,” the strategist details.
What the European equity market does reflect with the consolidation of recent weeks is that the market is increasingly aware that changes between the two currencies could have significant negative conversion effects for many large European companies, whose fate is is more affected by foreign profits than by domestic profits.
Pending elections
However, the renewed strength of the dollar not only responds to these fundamental factors, it also depends largely on the final outcome of the US elections.
“The policy mix of a Trump administration is likely to be more inflationary than that of a Harris administration,” Wewel points out.
“In particular, Trump’s tougher stance on immigration and the possible imposition of new tariffs point to further pressures on prices under a Trump 2.0 and, therefore, they advocate a more superficial path of rate cuts,” he adds. In the opinion of the Swiss private entity, the increased probability of a Trump victory has probably raised interest rate expectations in the US above which recent macroeconomic data would suggest and therefore largely explains the magnitude of the recent revaluation in the currency market.
“Investors will continue to pay attention to the publication of economic data to try to predict the future orientation of monetary policy in the US, as well as any news in the presidential race”, says Ruben Ferreira from FlowCommunity.
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