Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Column: Dollar smiling from ear to ear

EconomySep 22, 2021 04:36AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking/File Photo

By Mike Dolan

LONDON (Reuters) - Whether investors run for the hills or not after the past week's stock market shakeout, the episode provides a glimpse of where to run for cover - and the U.S. dollar came up trumps.

Dollar cash has routinely provided a haven during moments of global funding stress in the past - most recently as the coronavirus pandemic unfolded in March of last year.

The anxiety about a likely debt default by giant real estate firm China Evergrande - and even feared ripple effects across regional property firms, high-yield debt markets and banks - may not be quite on that scale.

But the worries provided enough of a trigger for the steep pullback in world shares this month, and the dollar has been one of the few clear winners during the turbulence.

Although that stock correction has been widely predicted - with a majority in a recent Deutsche Bank (DE:DBKGn) client survey saying they expected a 5-10% correction by year's end - the peak-to-trough plunge in MSCI's all-country index this month almost reached 5% on Monday.

China property nerves are far from over, and financial volatility gauges are their highest in months.

The dollar has performed impressively as a haven, its main trading index gaining more than half a percent over the last week - and it was up almost 1% against gold, more than 1.4% against sterling, almost 7% against Bitcoin.

Rival havens such as Japan's yen and the Swiss franc matched or outstripped that over the seven days just gone - but the dollar is clearly pumped up independently.

Of course, it's not all down to stress. The other big event of the week, the Federal Reserve's latest policymaking meeting, provides alternative fuel for the currency.

And some currency strategists see the dollar now getting a peculiar dual boost.

JPMorgan (NYSE:JPM)'s Paul Meggyesi and team reckon the greenback stands to gain from both corners of the so-called 'dollar smile' at the same time.

That 'smile' describes the observation that the dollar tends to benefit from both extreme stress and tension at one extreme - when highly dollar-borrowed firms around the world scramble for dollar cash and liquidity - and from rapid world growth and risk taking at the other - where U.S. equity outperforms and U.S. rates push higher. In between, it's at its weakest.

"Our confidence has increased that the dollar is on the cusp of a clearer break-out from either end of the dollar-smile, or indeed both ends concurrently," the JPMorgan team wrote.

On the left side of the smile, they see growing angst that world growth has peaked, policy support is being withdrawn, global stocks are overstretched and there are "mounting global tail risks" from China and related geopolitical fears.

On the right side stands the Fed and "U.S. rate-driven exceptionalism", they say. Fed policymakers this week are likely to signal the start of U.S. interest rate hikes from late next year and - crucially - up to six increases through to end-2024.


Interest-rate support for the dollar is sometimes overlooked by focusing on nominal U.S. bond yields in isolation - especially in a year like this one, when the dollar held firm even as U.S. Treasury yields recoiled during the summer.

A better measure of the dollar's fortunes is often seen in relative real, or inflation-adjusted, bond yields between the U.S. and other major economies or regions.

Having spent most of 2021 in negative territory, for example, the gap in two-year real yields between the U.S. and Germany turned positive last month, and this week the new premium on U.S. rates hit its highest level since June 2020. Ten-year equivalent U.S. rate premia are also at their highest since April.

This real rate view makes sense to those who see inflation expectations and growth potential dominating a currency's fortunes.

All things being equal, a tighter monetary policy today means lower inflation expectations, less erosion of the currency's value over time and a higher currency rate - all assuming growth potential is robust enough to sustain high rates and a higher 'terminal rate' in the tightening cycle.

And that needs to be set against growth and inflation expectations in Europe or Japan.

Morgan Stanley (NYSE:MS)'s Matthew Hornbach and team also see the dollar lifted further by the rising real rate view. And they think this week's Fed meeting could be a big moment.

"The September FOMC may be a key catalyst driving U.S. (real) yields higher, which we expect to boost the dollar broadly," they wrote this week.

(by Mike Dolan, Twitter (NYSE:TWTR): @reutersMikeD; Editing by Kevin Liffey)

Column: Dollar smiling from ear to ear

Related Articles

Dollar pares losses as Powell signals bond taper
Dollar pares losses as Powell signals bond taper By Reuters - Oct 22, 2021 4

By Karen Brettell NEW YORK (Reuters) - The dollar pared losses on Friday after Federal Reserve Chairman Jerome Powell said the U.S. central bank should begin reducing its asset...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email