Weekly Update

A Falling U.S. Dollar Fuels Stock Gains Abroad

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Published December 18, 2020

We recently noted the strength of non-U.S. stock markets. One of the primary reasons for that strength has been currency-related. The U.S. dollar, often a safe haven in times of stress, has been declining as investors focus on a recovery in global economies in 2021. Here is a writeup on the topic from Business Insider:

“As COVID vaccines roll out and a long-awaited US economic aid package looks increasingly likely, investors are piling into the kinds of assets that do well when times are good – and that’s not the US dollar.

The dollar has fallen by nearly 4% so far in the fourth quarter, its weakest performance in the final three months of the year since a 6.4% loss in the fourth quarter of 2003, and the losses look unlikely to slow any time soon.

“After a substantial multiyear rally, the US dollar appears rich versus other alternative “safe haven” currencies such as the euro and yen, which have become increasingly attractive,” PIMCO said recently in its annual outlook.

Dollar index reaches lowest in two years

In the darkest days of the coronavirus crisis back in March, when investors were ditching stocks, commodities, cryptocurrencies and even some fixed-income assets in droves, the dollar emerged as a life raft to which many clung when economic, social, and financial uncertainty was at fever-pitch.

Since then, thanks to the trillions of dollars in monetary and fiscal support from the Federal Reserve and the US government, the currency has fallen by over 16%, depressed by a combination of low interest rates that undermine its yield-appeal to foreign investors, as well as renewed risk appetite more broadly.

The greenback has lost around 6.5% against a basket of major currencies over the course of 2020, racking up a loss against every developed market currency, and now trades around its lowest since April 2018.

Where the dollar has outperformed has been against some of the hardest-hit major emerging-market currencies. In 2020, the dollar has gained 26% against the Brazilian real, nearly 20% over the Russian ruble, and 5% over the Mexican peso.

In terms of returns, anyone selling the dollar would have netted the best return against the Swedish krona, with a spot return of 12.14% year to date, followed by the Swiss franc – a traditional safe-haven currency – with a return of 9.5%, according to data from Bloomberg.

Currencies returns against US Dollar

With vaccines beginning to reach the general public, the economic outlook has brightened considerably, leaving the prospects for the dollar looking even weaker, according to some of the world’s biggest investors, banks and prominent economists.”

“A rapid recovery in the global economy should weigh on the “safe haven” Dollar, even if the US economy performs well,” Goldman Sachs analysts, led by Zach Pandl, wrote in a 2021 preview last month.

“Robust global growth tends to boost the currencies of commodity exporters, emerging markets, and the economies most geared to global trade, and tends to weaken the dollar,” Goldman said.

Economist Stephen Roach, once a former chairman of Morgan Stanley Asia, back in September repeated his call for the dollar to depreciate sharply based on the size of the US current account deficit, as well as the low national savings rate. In June this year, he said he expected a 35% crash in the value of the currency. The dollar index has fallen 14% since then.

“Lacking in saving and wanting to grow, we run these current-account deficits to borrow surplus saving, and that always pushes the currencies lower,” Roach said. “And the dollar is not immune to that time-honored adjustment.”

Market Update

Stocks continued their push into record high territory this week, encouraged by rollout of the coronavirus vaccine and expecting a new Congressional stimulus package. Monday saw stocks push higher by +0.4% as the first vaccine doses were administered to frontline workers. Stocks accelerated their gains Tuesday rising +1.3% on a surge in Apple shares. The iPhone maker is reported to be producing some 30% more phones in the first half of 2021. A pause in the rally Wednesday as retail sales showed a dip in November with a spike in virus cases slowing activity. Another +0.6% rise Thursday with strong earnings from homebuilder Lennar and drugstore RiteAid while the Federal Reserve reiterated its very accomodative monetary policy. Friday saw markets slip as investors pulled back with stimulus negotiations still failing to produce a deal. The loss was pared to -0.4% by day’s end, however, after seeing indexes lower by almost -1% at their lows.

Another solid week for stocks in what is typically among the strongest weeks of the year. The S&P 500 (SPY) added +1.22% while the Nasdaq 100 (QQQ) gained +2.72%. The Russell 2000 smallcap index (IWM) continued its surge, now seven weeks long, with a +2.97% rise.

Warm wishes and until next week.