A heavy outlook for the US Dollar

The US Dollar Index has sunk to a 22-month low and registered its fourth worst three-month return in a decade as of 24 July. The relentless spread of Covid-19 across the US and improving risk sentiment elsewhere is crimping demand for the safe-haven reserve currency. Interest rates suggest there could be more depreciation to come.


The dramatic collapse of the US dollar’s interest rate advantage over the rest of the world removed a key support for the currency. The average yield on US Treasuries is now in line with that of other government bond markets, after years of yielding much more. With leading economic indicators rebounding from their recent lows, investor risk sentiment has been given a boost, further denting the demand for the safe-haven currency.

The problem for the dollar is that its long-term fundamentals are poor. The large scale of debt monetisation in the US will continue to depress interest rates, keeping downward pressure on the dollar. Even before the global health crisis, the US had a 5.9 per cent cyclically-adjusted deficit in 2019, vs. the Eurozone’s 1.1 per cent. This likely limits the scope for US economic growth outperformance in the coming cycle.

Dollar depreciation has also been driven by a resurgent euro, which represents over half of the dollar index. Last week’s agreement among European Union leaders on the shape of the €750 billion recovery fund appears to be another game-changing ‘whatever it takes’ moment, spurring confidence in the region’s assets. However, the euro is close to a two-year high, so perhaps most of the good news is already priced in.

Even if risk sentiment was to turn, we think the Japanese yen might be a better option for safety now that the yield disadvantage is less prohibitive. The yen offers better value in terms of purchasing power parity and Japan has suffered less from the global health crisis so far.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. Investments in small and emerging markets can be more volatile than investments in developed markets.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. 

© 2021 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.


Want more insights like this?

Get our free, monthly e-newsletter bringing you valuable insights, opinion and education.