Dollar Claims Top Spot in Major FX for 2021 Performance, but Can it Hold the Mantle?

- USD brushes aside GBP, CAD et al in clean sweep of FX board
- To tentatively become 2021’s top performing major currency
- Amid global market risk aversion & pending Fed policy shift
- Virus, global economic risks & Jackson Hole key to outlook

Image © Adobe Images

• GBP/USD reference rates at publication:
• Spot: 1.3672
• Bank transfers (indicative guide): 1.3293-1.3389
• Money transfer specialist rates (indicative): 1.3550-1.3579
• More information on securing specialist rates, here
• Set up an exchange rate alert, here

The Dollar ceded ground to the safe-haven Japanese Yen Thursday but otherwise swept the board of all opposition in a rally that has tentatively awarded it the top spot among major currencies for 2021, although it remains to be seen if the greenback can continue to hold the coveted mantle.

Dollars were bought almost across the board heading into the weekend, even pushing the Pound-Dollar rate briefly to a 2021 loss alongside the Canadian Dollar and in the process swept aside this year’s two main contenders for the top spot among major currencies.

Thursday’s losses for stock and commodity markets have served only to put further wind into the sails of a resurgent Dollar after minutes of July’s Federal Reserve (Fed) meeting lifted the U.S. currency back onto its front foot in overnight hours, with a broad range of concerns cited by analysts.

But with the Pound-Dollar rate still to its 2021 opening level of 1.3672 on Thursday, and with USD/CAD not far above its equivalent of 1.2729 much now depends on whether investor sentiment toward the global economic outlook continues to fray, and for how long the Fed tailwind supports the Dollar.

“Markets are starting to price in a global slowdown on COVID-19, supply chains and political concerns. That is an environment where long USD positions via high beta FX such as SEK, NOK, AUD, NZD or CAD could outperform too,” says Jordan Rochester, a strategist at Nomura, who’s recently been a buyer of USD/CHF and a seller of EUR/GBP. “This is why we add to our long USD positions via spot in USD/NOK.”

Above: U.S. Dollar Index shown at daily intervals alongside Pound-Dollar rate.

Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more.

Any further deterioration of expectations for global growth, for whatever reason, would be an almost surefire catalyst for the Dollar to keep pressure on the Pound, Canadian Dollar and those others, in the process likely claiming and cementing its grip on the top spot among major currencies.

This means there’s also a lot to be determined by whether financial markets are able to quickly adjust to uncertainties arising from new incarnations of the coronavirus, short-term stoppages in economically significant production industries and mud-slinging in the geopolitical arena.

Coronavirus outbreaks continue to cause disruption in key global manufacturing hubs across Asia, threatening further goods shortages and a longer yet still transitory brush with inflation pressures across the globe.

{wbamp-hide start}

{wbamp-hide end}{wbamp-show start}{wbamp-show end}

However, the longer-lived and more durable influence for the Dollar and wider currency market must contend with is the pending shift in Fed policy.

“In the near term, the Fed and COVID-19 are the main factors for markets to track – especially judging whether Delta manages to weaken the vaccine wall. But there are other components to consider in September and Q4,” Nomura’s Rochester says. “Electoral pressure is in the pipeline, with the potential for surprises in Germany, Japan and Canada. The ECB may cut its PEPP purchases, US debt limits could be a risk or more likely US infrastructure spending is finally agreed upon.”

Wednesday’s Fed minutes showed a majority of Federal Open Market Committee members were of the view at the July 27-to-28 meeting that if the U.S. economy developed in line with June’s projections in the interim, the necessary conditions would be in place for the Fed to commence the process of winding down its $120BN per month quantitative easing programme before year-end.

Above: USD/CAD shown at daily intervals alongside U.S. Dollar Index.

Wednesday’s minutes were a surprise to a sizable number of analysts and other commentators given previous expectations the Fed would announce something in September or November, for implementation some time in the New Year.

This has scope to remain an advokat of the Dollar, especially if investors continue to perceive it as something that have a large impact on the U.S. bond market or bring forward the timing of Fed interest rate rises.

But, as some analysts have pointed out on Thursday, the risk for the Dollar is that Fed Chairman Jerome Powell uses an eagerly-awaited address at next week’s Jackson Hole Symposium of central bankers to discourage financial markets of that view.

“While the aggregate long-USD position of IMM leveraged funds in last week's survey was not huge, we think it is important to point out that the FX market is already long-USD,” cautions Stephen Gallo, European head of FX strategy at BMO Capital Markets.

“With that in mind, we suspect that follow-through may begin to get laboured right around this point. And of course there is always the risk that Fed Chairman Powell uses his Jackson Hole speech next week to correct the impression left by the Minutes,” Gallo adds.

In this context it could be most notable for the Dollar and any bid to hold onto the top spot among major currencies for the year that Wednesday’s minutes also made clear that “many participants” were keen to impress upon the outside world that there’s no such thing as a “mechanical link between the timing of tapering and that of an eventual increase in the target range for the federal funds rate.”