The End of the Peak of the Dollar
Investors have recently been selling the dollar at the fastest pace this year. This is on the back of speculation by investors and asset managers that the Federal Reserve has ended its contractionary monetary policy of high-interest rates as a result of the 3.2% fall in US inflation in October this year and also due to the easing of the US labour market. These low interest rates will result in lower returns for asset managers and investors, as there will be less return on savings and fixed-income investments such as bonds and other US assets.
Asset managers are on track to sell 1.6 per cent of their dollar positions this month, the largest monthly outflow since November last year, according to State Street, which has $40 trillion in assets.
This will, and has, contributed to the deterioration of the US dollar as this dollar selling reduces demand for the dollar, pushing its value even lower, which in turn creates a cycle of mass selling. This has led to the dollar’s worst performance this year. There is speculation that this deterioration will continue due to the large amount of investor holdings.
This speculation is in stark contrast to the dollar’s performance in recent months. The US dollar has been stronger against the falling euro. This is because the Israeli-Palestinian conflict has pushed up the price of imported energy, which has affected the eurozone’s development.
The dollar may not need to be a safe haven for asset managers and investors in the future. Currencies such as the yen have fallen 12 percent against the dollar this year, with November offering some respite as the currency strengthened by around 1.5 percent.
Geoff Yu, a currency strategist at BNY Mellon, said: ‘There’s not much point in being short the yen [betting on a falling price] as every Bank of Japan policy meeting is a live event,’ and he expects the yen’s strength to continue as the Bank of Japan is widely expected to raise interest rates.
Written by Mueez Lodhi
Produced by Madhav Bhimjiyani