Dollar weakness

  • The dollar is down 4.5% this year and near a one-year low against a basket of currencies, other investments have surged. U.S. crude prices are up 69% from their February lows. Gold was up 16.5% in the first quarter, its best in three decades. And emerging-market stocks, bonds and currencies have enjoyed double-digit gains in 2016.
  • The concern is that it is a relationship that could easily go in the opposite direction. The dollar is heavily dependent on perceptions of what the Federal Reserve will do with interest rates, and those perceptions could change quickly. Meanwhile, analysts warn that the fundamentals for oil, emerging-market assets and even many stocks look too weak to support the recent price gains on their own.
  • “Currency is the most influential factor for markets this year,” said Graham Secker, head of European equity strategy at Morgan Stanley. “If the dollar starts moving higher, global risk appetite will fall.”
  • When the dollar weakens, dollar-denominated commodities tend to appreciate in value, even though many of those markets are heavily oversupplied. Also, emerging-market currencies strengthen, and the foreign-currency debt of those countries becomes cheaper to pay back. Still, many developing economies are struggling with waning demand from China, a major commodity customer. Stocks and other assets could also get caught in any dollar updraft.
  • Federal-funds futures, used by investors and traders to place bets on central-bank policy, showed Friday that the odds for a rate increase at the Fed’s June meeting were 13%, while the chances of a rate increase at the December meeting were 61%, according to CME Group.
  • Hedge funds and other speculative investors are now more bearish on the dollar than at any other time since February 2013, data from the CFTC and Scotiabank shows.
  • The negative view on the dollar has grown as the Fed displayed a more cautious view on raising interest rates, while central banks in Europe and Japan appear reluctant to ease their own monetary policies further. That is bad news for the dollar, which has benefited from expectations that the gap between U.S. and foreign interest rates will continue to widen.
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