06/04/2015 08:04 AST
The US dollar’s record rally, which rattled everything from the oil market to US corporate earnings, is running out of gas.
Many investors remain bullish for the longer term, but some say the greenback’s biggest gains are in the rearview mirror.
The dollar’s downshift reflects heightened concerns that the US economy is cooling, which were reinforced on Friday by a much weaker-than-expected jobs report. That has a growing number of investors betting the Federal Reserve will put off any interest-rate increases until the end of 2015.
Just a few months ago, many investors were thinking a Fed rate boost, which would be its first since 2006, could come as soon as June. Higher rates in the US make owning the dollar more attractive.
Also pressuring the US currency is a brightening outlook for the struggling economies of Europe. The dollar’s surge during the first three months of the year was fuelled by aggressive economic stimulus efforts from the European Central Bank, which drove down eurozone bond yields. The greenback rose 12.7 per cent against the euro, its biggest quarterly jump since the common currency was created in 1999.
“The easy part of the dollar rally is definitely behind us,” said David Woo, head of global rates and currencies at Bank of America Merrill Lynch in New York.
For US investors, a stalling out of the dollar’s rally could have widespread implications, both good and bad.
The buck’s big rise over the past year has been blamed for hurting profits among US multinational companies as their goods become less competitively priced overseas, hitting their share prices and crimping manufacturing activity.
A decline in the dollar could lessen those headwinds, as well as contain downward pressure on oil prices and provide relief for the battered energy sector. Because oil is priced globally in dollars, a weakening US currency makes oil cheaper for buyers using other currencies, supporting demand.
“A weaker dollar could help on a lot of fronts,” said John Canally, chief economic strategist for LPL Financial. The jobs report will make it harder for the dollar to extend its rally, he said.
On Friday, the dollar took its biggest tumble in almost two weeks following slower-than-expected US job growth for March. The Labor Department reported non-farm payrolls grew by 126,000. Economists surveyed by The Wall Street Journal had forecast an increase of 248,000.
The euro climbed 0.9 per cent on Friday to its highest level in a week, at $1.0973, while the dollar slid 0.6 per cent versus the yen, to Yen118.97.
The dollar’s recent drop has moved it away from multiyear highs it reached against rivals. The Wall Street Journal Dollar Index, which measures the greenback’s performance against a basket of currencies, hit a 12-year high on March 13 at 89.33, up 22 per cent from a year earlier.
But since the Fed signalled a continued go-slow approach to raising rates on March 18, the WSJ Dollar Index has fallen 2.6 per cent.
The weak jobs report followed a string of other soft economic data points, including readings on manufacturing activity and retail sales.
Some investors are worried that the US economy, which has been a bright spot in the world, may advance at a slower pace than many economists and analysts have anticipated. This could hurt the outlook for companies’ earnings and sap appetites for US stocks and corporate bonds sold by lower-rated companies, known as junk debt. Investors would instead seek shelter in ultrasafe US government debt.
The uncertain growth outlook has investors pushing back their expectations for when the Fed will raise interest rates. The Fed has kept the federal-funds target rate near zero since December 2008 to help the economy regain momentum after the financial crisis.
WSJ
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