February 21, 2020 — 4 min read
The dollar climbed to its highest level in years this week, a reflection of the safe haven status of the American economy against a global backdrop highly impacted by the coronavirus. Negative economic updates from Japan, Britain and Germany have only added to the uncertainty created by the coronavirus, which all but stalled China’s economy for weeks. The slowdown has underpinned a flight to American equities and bonds, as global investors exchanged their currencies for dollars — pushing the value of the dollar higher — and then used those dollars to snap up financial assets.
“People are spooked by the coronavirus, and the global economy is weakening. It’s struggling mightily,” said Bob Schwartz, a senior economist at Oxford Economics in New York. “And whenever this happens, you see a capital flight into dollar-denominated assets.”
The U.S. dollar index, which marks the dollar’s value against six currencies of major trading partners, is up more than 3.6 percent this year, pushing it to its highest level since April 2017. It was up 0.2 percent on Thursday.
The dollar has risen more than 1 percent against China’s government-managed currency, the renminbi, in February alone. For the year, it’s up more than 3.5 percent against the euro, 3 percent against the yen and more than 2.5 percent against the British pound.
Those regions have faced a slew of underwhelming economic results.
Official reports this month showed that the British economy flatlined during the fourth quarter. A report last week showed that the Japanese economy shrank at a 6.3 percent annual clip during the fourth quarter, in part because of a tax increase. And this week, survey data about economic sentiment in Germany tumbled anew, as the country’s manufacturing sector copes with the fallout of the coronavirus outbreak in China, a key customer for its industrial goods and automobiles.
“Currencies are weakening on incoming bad data that leads to inflows into dollar assets,” wrote Ben Emons, global macro strategist at Medley Global Advisors.
While weakening foreign fundamentals have pushed money out of those markets, the relatively high interest rates in the United States have meant a strong pull.
Yields on U.S. Treasury bonds — a benchmark for measuring investment returns — are quite low by domestic standards, but they’re generous compared with global rates.
The yield on the 10-year Treasury note was about 1.52 percent on Thursday, much better than the negative yields of roughly 0.04 percent and 0.44 percent on 10-year government bonds from Japan and Germany. (Negative yields effectively mean that lenders are paying borrowers for the privilege of handing them money.)
The strengthening dollar can be a boon for the American economy: It helps lower the costs of borrowing and makes imports cheaper, bolstering already strong consumer sentiment.
But that dynamic can also have negative consequences. Despite the country’s robust labour market, business investment has been shrinking and manufacturing has struggled since late 2018 — and a strong dollar won’t help those parts of the economy much.
American exports such as aircraft, automobiles and soybeans become less competitive on global markets as the dollar rises in value. That, in turn, could weigh on the industrial manufacturers, from the makers of farm equipment to the factories that churn out piping for oil and gas extraction. A slowdown in foreign economic growth will also weaken overseas demand for American-made goods.
“There is no question that the industrial side of the economy continues to suffer the effects of weak global growth, the strong dollar, tariffs and trade uncertainty,” Mr. Schwartz wrote in a recent client note. “Those headwinds are not expected to vanish anytime soon.”
Key rates at time of writing:
GBPUSD - 1.2901
GBPEUR - 1.1941
EURUSD - 1.0803
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