Dollar’s bad month good for economy

There’s been some chatter in markets that the rebound in equities in October and a re-steepening of the Treasury market’s yield curve are signs that investors believe the global economic outlook is looking up – or at least not getting any worse. As indicators go, those are fine, but perhaps the most telling may be the dollar.
The Bloomberg Dollar Spot Index — which measures the US currency against a basket of major peers — is on track for its worst month since January 2018, falling 1.94% as of October 31. That’s actually a positive: It suggests the risks that lured global investors into the safety of the dollar in September, pushing it to near-record highs by some measures, seem a little less threatening.
US-China trade tensions have ratcheted down, with both sides expressing a desire to reach a partial deal to minimise further damage to the world’s two biggest economies, even if a larger agreement is still unresolved. Developments suggest the UK may be able to avoid crashing out of the European Union in a no-deal Brexit, reducing much of the uncertainty weighing on Europe’s economy. Major central banks led by the Federal Reserve are back in easing mode, or at least not tightening. And International Monetary Fund’s annual meeting in Washington earlier this month wasn’t as dour as many expected, with the group actually forecasting faster growth next year.
Of course, few are suggesting the economy has turned the corner. The odds of conditions worsening are still high, keeping the dollar relatively strong. But the rush to the greenback has subsided, and that’s a welcome sign. It’s also worth noting how beneficial the recent dollar weakness has been to supporting growth, starting with trade.
Prices of most goods traded around the world are set in US dollars, and that is only growing. The US currency accounts for 40% of global payments, up from less than 30% as recently as 2012, according to the Swift messaging network that enables cross-border payments worldwide. As such, broad-based dollar depreciation can lead to lower import prices globally, supporting consumption and investment, according to a report by Capital Economics global economist Simon MacAdam.
It’s notable that currency strategists have stopped raising their dollar forecasts and are even trimming them for the first time since June, according to data compiled by Bloomberg. They now see Intercontinental Exchange Inc.’s US Dollar Index, which was trading at around 97.306 on Thursday, ending the year at 97.7, down from an average estimate of 98.45 last month. They see the gauge dropping to 96.10 by the end of the first quarter, down from a prior call of 97.20 in September.
Forecasting currencies can be more difficult than playing three-dimensional chess, but if the strategists are right and the dollar heads lower, the global economy will be a prime beneficiary.
—Bloomberg

Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis