US dollar has further to rally despite FOMC rate cuts - Westpac

In the view of Elliot Clarke & Simon Murray, Analysts at Westpac, Expectations for rest of world are weaker than for the US economy, supporting the US dollar.

Key Quotes:

“Through both ‘risk-on’ and ‘risk-off’ episodes this year, the US dollar trend has remained upward sloping with the US seen as both the best-performing developed market and a yielding ‘safe-haven’ amid global uncertainty.

Despite President Trump's actions this month, to our mind, this US dollar trend is set to extend into 2020.

Why has the US dollar appreciated as US interest rates have moved lower? Simply because the deterioration in expectations has been even more dramatic elsewhere.

First, the past year has shown that disruption from the Sino-US trade war has had an outsized effect on Europe’s open economy versus the more-insular US – total external trade equates to 51% of GDP for the Euro Area compared to 27% in the US. Subsequently, European investors are likely to look to redeploy capital overseas again in line with relative growth fundamentals.

Second, even after our forecast three cuts in the federal funds rate to 1.375% at December, US treasuries will remain a high-yielding safe-haven asset, further aiding the US dollar.

Also aiding the US dollar trend over the coming 12 months will be ongoing turmoil in the UK. As detailed in August Market Outlook, after Boris Johnson’s succession of Theresa May as Prime Minister, the UK has a hard-line leader for Brexit negotiations with little, if any, room to negotiate a better deal than the one repeatedly voted down by UK Parliament.”