By Jamie McGeever
ORLANDO, Florida (Reuters) -While the dollar has benefited greatly this year from the tech-led wave of American “exceptionalism” that has boosted U.S. growth, productivity, profits and stock prices, it has also gotten a huge helping hand from its American economy. crisis-prone rivals.
Unforeseen political and economic events have drawn investors to the safety of the dollar throughout the year. Just look at the political chaos that erupted seemingly out of nowhere in South Korea on Tuesday, sending the won to a two-year low and at one point heading for its worst day in eight years.
It is true that the won is perhaps the twelfth most traded currency in the world, accounting for barely 2% of average daily currency turnover. But South Korea is Asia’s fourth-largest economy and the wave of volatility that swept across currency and stock markets, forcing emergency measures from Seoul to maintain financial stability, has darkened the cloud over broader emerging markets .
This is especially true in Asia, where fear of tariffs from the new administration of new US President Donald Trump has also reached an all-time low this year.
It’s safe to say that few analysts would have had martial law in South Korea on their 2024 bingo cards on January 1. It is doubtful whether they also had: bloodless growth in the Eurozone, where economic weakness in Germany and political crisis in France are central; China sleepwalks into deflation; Canada’s sluggish growth, which prompted the deepest interest rate cuts in the G7; The Japanese yen falls to its weakest point in 33 years; and budget fears that are sending the Brazilian real to a record low.
Many observers will argue that this has always been true in the foreign exchange market, a zero-sum arena where prices are always relative. But this year has been especially good for the dollar due to the idiosyncratic political issues and economic weakness that have devastated developed and major emerging market currencies.
UNPARALLELED BACKWINDS
The currency market’s old dictum that the dollar is the “cleanest dirty shirt” in the currency laundry basket has been borne out by the events of the past year.
Consider that the , a measure of the dollar’s value against its G10 peers, is up just 5% this year, while the US has tightened its stranglehold on global equities like never before. Foreigners have poured record amounts into American stocks this year, and American investors have stayed home en masse.
In addition, the Federal Reserve has taken a much more cautious approach to cutting interest rates than the market expected a year ago, providing another unexpected tailwind for the dollar.
Early this year, interest rate futures had priced in about 150 basis points of expected Fed easing in 2024. With one policy meeting to go, it’s clear that won’t happen.
Add to that the problems that have plagued the eurozone, Canada and other major economies, and a 5% valuation suddenly doesn’t seem all that impressive. Granted, the dollar has risen more against many emerging market currencies, but these are much smaller components of the dollar’s overall value.
Given all this, you might expect the dollar to have appreciated more this year than it has.
Looking ahead, the question is: can it shine on its own merits next year? Maybe. It is certainly difficult at this point to imagine how the Eurozone, China or any other major economy will engineer a significant recovery next year that threatens the dollar’s dominance.
But with the dollar hovering around its strongest level in more than two decades and investors heavily long, further appreciation will become a much more difficult task. Especially if other shirts in the global currency laundry basket fail.
(The views expressed here are those of the author, a columnist for Reuters.)
(by Jamie McGeever; editing by Paul Simao)
