The resurgence of US dollar strength will weigh on asset prices. On one hand, a strong greenback will put pressure on other currencies, commodities like gold and oil, as well as stock markets. On the other hand, falling asset prices will boost safe-haven demand for the US currency.
It’s quite interesting that the US dollar has set new records against both the Japanese yen and the euro.
The currency has shown strength at the start of the year. The US dollar index surged to 100 a month ago before falling back to 95. The dollar’s 90-day average has moved in the range of 119 and 122 against the Japanese yen, despite the mixed picture from Japan’s economic data.
Moreover, the European Central Bank expanded its monetary easing in early March, which restored some growth momentum into the regional economy. As a result, the euro has rebounded from 1.05 to 1.14 against the US dollar. Some analysts have predicted that US dollar will level off and euro will strengthen further.
Market expectation has changed although market fundamentals have not. The investment behavior reflects the personality and mindset of an investor. Most people are reluctant to make a key decision amid an ambiguous situation, and they will hold off until some key changes occur.
US Federal Reserve chair Janet Yellen has said she expects interest rates to rise this year, sending a clear signal to market participants that there will be a widening divergence between the US dollar and other major currencies in interest rate direction.
The United States will hike interest rates, while key other economies will keep their rates unchanged or even lower them.
The US dollar regained its strength following Yellen’s remarks. It has hit the record level of 123 against the Japanese yen, which is expected to weaken further in the long term. I believe the US dollar could test a new high of 130 against the yen this year.
On the other hand, the euro has lost some strength and eased below 1.1 against the US dollar.
There are some subtle changes in the eurozone. Greece and other members of the eurozone are still wrestling against each other, while the market focus has already switched to Spain and Italy.
The situation in these less-wealthy southern European nations is very similar to that of Greece. Most citizens in these nations are against the austerity measures imposed by the eurozone. As the opposition continues to gain popularity in these nations, investors might fret over their economic recovery prospects.
The 10-year government bond yield in Italy and Spain has jumped more than 0.6 percent to a three-month high. As such, the eurozone may not be a good destination for investors if they consider the situation in these southern European nations as well as the complicated relationship between the United Kingdom and Scotland.
This article appeared in the Hong Kong Economic Journal on May 28.
Translation by Julie Zhu
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