Analysts at BBH note that the US dollar has been marked lower since the middle of last month as it flies in the face strong growth, rising inflation expectations, and greater conviction that the Fed will continue to raise interest rates this year.
Key Quotes
“Moreover, an oft-cited knock on the dollar, the widening current account, may be offset this year by the impact from US corporations repatriating earnings that have been kept offshore.
Another weight on the dollar, some suggest, may be coming from the diversification of reserves. Last week's US Treasury report did show that China and Japan, the two largest foreign holders of US government obligations, were both net sellers. Yet there may be less here than meets the eye. When the dollar depreciates in the foreign exchange market, it boosts the dollar-value of the reserves held other currencies. This has the effect of lowering the dollar's share of reserves.”
“US TIC data through November shows foreign holdings of US Treasuries rose by nearly $338 bln last year, of which foreign officials accounted for $242 bln or a little more than 70%. Many countries accumulate dollars by intervening in the foreign exchange market to blunt or smooth the appreciation of their currencies. The IMF's COFER data, which tracks central bank currency reserves, is not inconsistent with some minor diversification, though it may be distorted by the gradual inclusion of the allocation of China's massive reserves.”
“The prospects of the partial shutdown of the US government ahead of the weekend did not unduly weigh on the US dollar, which in fact, closed near its session highs. The occasional shutdown of part of the federal government is an idiosyncratic political quirk in the United States. There have been 18 previous occurrences since 1977, and about half last for three days or less. The most recent one, in 2013, took a little more than two weeks to resolve.”
“The real economic impact is minor at best. In reality, much of the government continues to function. Less than half the government workers are directly impacted. The government's shutdown though could impact the release of economic data, which in the days ahead was to include the first look at Q4 GDP. Still, to the extent that there is a reduction of hours worked by government employees, the shutdown could see economists shave around 0.1% of their Q1 GDP forecasts per week.”
“The most common element in the narrative of dollar bears appears to be the shift in monetary policy elsewhere. Last week's hike was the third in three quarters by the Bank of Canada. However, since the middle of last year, the Canadian dollar's performance not been particularly strong. Its 3.8% appreciation against the US dollar puts it near the bottom among the major currencies. Only the yen, Swiss franc, and New Zealand dollar did worse, and the latter two have depreciated. Last week, the Canadian dollar gained 0.6% against the US dollar, the least among the major currencies.”
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