AS GLOBAL central bankers put their tightening plans on hold, the US dollar may emerge again as a winner. Not because it's particularly attractive, but rather because it's proving to be the best of a bad lot.
From the Reserve Bank of Australia (RBA) to the European Central Bank, officials are acknowledging a rising tide of risks, and shifting their monetary-policy outlooks as a result. The upshot is that even with the Federal Reserve signalling that it's done hiking interest rates for the foreseeable future, foreign-exchange traders increasingly see the US currency holding its own as the world's doves gain the upper hand. Since the Fed's pivot last week, the dollar has gained about 0.5 per cent, outpacing all of its Group-of-10 peers.
The US is the "best of a pretty bad bunch", James Athey, a senior investment manager at Aberdeen Standard Investments in London, said in a Bloomberg TV interview. While noting that the American economy remains on an upward trajectory, for the eurozone "that story does not apply in the slightest. The underlying health of the economy from a structural and now a cyclical perspective is far, far, far weaker".
Wall Street has long expected a dollar slump this year, fuelled by converging monetary policies as US economic outperformance wanes relative to the rest of the world.
Yet increasingly 2019 is shaping up to be a race downward among currencies stamped with an abundance of bearish outlooks.
RBA governor Philip Lowe shifted to a neutral policy stance this week, acknowledging greater economic challenges at home and abroad and sending the nation's currency lower by almost 1.8 per cent on Wednesday. And last month, European Central Bank president Mario Draghi admitted that the eurozone's risks had moved to the downside as trade tensions and politics threaten to derail the region's expansion. Most investors and economists now don't anticipate the ECB to raise borrowing costs until December at the earliest, and perhaps much later.
That's left the US economy looking relatively robust by comparison as policy makers pivot from preventing any overheating to sustaining its expansion.
Along with recent upside on dollar crosses, traders are already paying more for options contracts that benefit from the greenback gaining against its major peers over the next several months relative to hedges guarding against a drop. Meanwhile, the gap between US and German 10-year yields has widened about nine basis points since the start of the year, even as Treasury rates touched an almost one-year low in January.
"That's the paradox, that the dollar is gaining even though US yields remain low," said Win Thin, Brown Brothers Harriman's global head of currency strategy.
If the market begins to price back in a Fed rate hike later this year and 10-year Treasury yields move higher, "that would be the next leg for a dollar rally". BLOOMBERG