By Hussein Sayed
The suggestion by President Trump to delay the election may just be the first curveball of many we could see in the coming months
The US dollar enjoyed some much-needed respite at the start of this month after hitting an avalanche of selling in recent weeks. However, after experiencing its worst fall since 2010, some market observers have been keen to question the Greenback’s status as the world’s reserve currency, especially as selling has resumed recently.
If this is too hasty an assumption, for sure the global perch upon which the dollar rests has become increasingly shaky with headwinds potentially lingering for some time yet.
The dollar tumbled the most in a decade last month, hitting its lowest point against a basket of currencies since 2018.
The near five percent drop may not sound like much compared to say Apple’s recent ten percent move after blockbuster earnings, but it is a dramatic move for the global reserve currency in a relatively short space of time in the world of foreign exchange trading.
Question marks over both the economic recovery and domestic politics have seen a new risk premium being placed onto US assets due to a resurgence in US Covid-19 cases. Even if we do seem to be reaching the peak in these numbers, the presidential election in November will highlight the administration’s handling of the crisis as rising uncertainty builds.
The suggestion by President Trump to delay the election may just be the first curveball of many we could see in the coming months.
The ongoing fall in (negative) real yields is the big issue here and has dented the dollar’s ability to catch a bid, as those interest rate differentials historically seen between the strong economy of the US and other countries have narrowed dramatically.
These fundamental developments will take some time to reverse which ultimately further undermine the cyclical support for the dollar in the medium-term.
But when all is said and done, let’s not forget that at the peak of the crisis back in March, what asset did investors turn to? The nine percent appreciation by the dollar in as many days tells us the answer.
That the USD share of international reserves has barely moved around 62 percent in the years since the GFC in 2008 also highlights the stability for its reserve currency status. And there really is no other currency or country that is ready or willing to take on the dollar’s role.
One asset that has been incredibly rangebound recently is oil, which had remained anchored around the $43/bbl level for several weeks. But further weakness in the Greenback and reports that US crude oil inventories declined significantly more than expected recently pushed prices to five-month highs.
However, the apparent slowing of the demand recovery, as well as rising OPEC+ production, is leaving speculators nervous that the path to more gains may stall.
As the supply/demand balance tightens more slowly than predicted, there are fears that we may see a correction to the April-June price surge. Interestingly, the bounce in prices from the lows of the pandemic has retraced around half its move from this year’s peak, and the longer prices track sideways, the more pressure builds for an explosive move.