Oliver Mangan: Countdown to November’s US election could pose currency risk

The dollar retains the upper hand on foreign exchange markets, with the currency hitting three-year highs on a trade-weighted basis in recent days.

Oliver Mangan: Countdown to November’s US election could pose currency risk

The dollar retains the upper hand on foreign exchange markets, with the currency hitting three-year highs on a trade-weighted basis in recent days.

The currency has been at high levels for the past five years, underpinned by a strong economy and relatively high interest rates.

It took a bit of a breather in 2019 as US growth slowed somewhat and the Federal Reserve cut rates on three occasions.

However, the dollar has been on an upward trajectory to date this year.

It has made gains against the euro, sterling, yen and other key currencies, boosted by stronger data on the US economy.

The US stock market has also hit new all-time highs in recent days on the back of this good data.

Recent labour market data have been particularly strong in the US.

The employment report for January showed very robust job growth even though the unemployment rate has fallen to a 50-year low at around 3.5%.

There are also signs that the housing market is gathering strength, while survey data point to good momentum in the large services sector of the economy.

It is no wonder the view of Federal Reserve policymakers is that the next move in US interest rates is likely to be upwards, although not until 2021.

The dollar is also the world’s largest reserve currency and viewed by markets as a safe haven in times of uncertainty.

Thus, it may also be benefitting from a flight-to-quality at the present time given the nervousness in financial markets caused by the coronavirus outbreak and the impact this could have on global growth.

Much market attention has also been on the euro, which has slipped to three-year lows against the high-flying dollar, below the $1.08 level.

The euro-dollar rate was confined to just a six cent corridor of $1.09-$1.15 for the whole of 2019, but with an underlying trend of the euro edging lower for most of the year.

The euro moved within a $1.12-$1.15 band in the first half and then $1.09-$1.12 in the second half of 2019.

It is hard to make a case for a recovery by the euro other than that it has fallen to low levels.

It is expected that economic growth will remain weak in the eurozone.

Thus, money market rates are predicted to remain negative into the second half of this decade, thereby continuing to act as an ongoing headwind for the single currency.

Meanwhile, the dollar only seems likely to weaken significantly if it becomes apparent that the US economy is heading towards recession and the Fed has to cut rates a lot further.

The US November elections, though, could also pose a risk to the currency if it results in a marked change to the political landscape in Washington DC.

There is a lot of strong technical support for the euro in the $1.06-$1.08 region.

The currency spent a considerable amount of time trading around this level in 2015-16.

Indeed, the euro has only traded below the $1.05 level for any length of time during the period 2000-2002.

Meanwhile, the market has become quite long on the dollar again, suggesting its scope for large gains may be limited from here.

Thus, we don’t see the recent move downwards in the euro-dollar rate as the start of a sharp slide by the single currency.

Instead, we think the euro is moving down to trade in a slightly lower trading range of $1.06-$1.09 in the coming months.

Oliver Mangan is chief economist

at AIB

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