The slowdown in Chinese growth and the way markets shrugged-off weak non-farm payroll data at the start of September suggests the US dollar’s recent strength is likely to continue.
Nearly three months on from the hawkish meeting of the US Federal Reserve’s (Fed) Open Market Committee meeting in June, the Dollar index (DXY), a measure of the US dollar versus a basket of other key currencies, has gained 2.5% and is now trading in the 92-93 range.
Having peaked at 93.57 in mid-August, the DXY slid in the next couple of weeks to 92.03. However, a fresh rally has begun since early September and on Monday (13 September) the DXY was 0.25% higher at 92.81.
China growth slowdown
Jonathan Petersen, markets economist at Capital Economics says both commodity markets and Chinese economic fundamentals point to the US dollar’s continued strength.
“The growth slowdown in China, the world’s largest commodity importer, and the eventual easing of supply constraints suggest to us that the prices of most commodities will probably continue to fall over the next few years.
In the past, this backdrop has tended to coincide with a stronger greenback,” Petersen also said that there is not much “more room for appetite for risk” to grow and undermine the dollar.
Poor US non-farm payroll data
“We suspect the [US] dollar is more likely to benefit periodically from safe-haven flows,” he added.
Philip Wee, senior foreign exchange (FX) strategist G3 and Asia at DBS Bank, wrote in a note that the US dollar is not falling despite “the big miss” on 3 September US non-farm payrolls, and he said that currently currency pairs are unlikely to break out of their recent ranges in the near future.
There are some dissenting voices around a positive outlook for the US dollar.
CNY may strengthen versus the dollar
ING’s said “local stories” such as the reopening of talks between US President Joe Biden and China’s President Xi Jinping can keep supporting the CNY, the offshore yuan, against the dollar.
“More signs of at least tentative improvements in Sino-American relations may keep driving USD/CNY lower and away from the 6.50 level,” a note from ING said, authored by FX strategist Franseco Pescole and head of global markets Chris Turner.
ING said that a stronger CNY can also have a positive impact on other Asian emerging markets' currencies.
Citi is postive about the mid-term dollar outlook
Richard Franulovich, head of FX strategy at Westpac said a more meaningful DXY appreciation path “still lacks foundational underpinnings”, even if the Fed raises rates by 50-75 basis points in 2023.
“But FX markets are unlikely to take their cue from that until they can look beyond near term tapering prospects, likely not until mid-2022. The all-clear then for a more material shift in the DXY’s fortunes are not fully in place,” Franulovich wrote in a note.
While Citi said in an outlook released on Monday (13 September) that it expected the US dollar to be weighed down by weaker economic data in the short-term, its analysts were most positive about the next six to 12 months.
US economic growth "resilient"
The US lender expect the greenback to be stronger as commodity centric currencies will “underperform” and a “resilient” US economic growth.