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Dollar set for worst month since July as global outlook brightens

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The dollar is set to post its worst month since July after vaccine breakthroughs boosted investor confidence and the global economic outlook, pushing the haven currency to its lowest level since April 2018.

The sagging dollar on Monday pushed the euro above the $1.20 level for the first time in three months, while many emerging market currencies also recorded gains.

The US currency has fallen 2.6 per cent against a basket of six major developed-market peers since the end of October, deepening its 2020 loss to about 5 per cent.

Investors turned negative on the dollar earlier this year because of aggressive easing policies launched by the Federal Reserve and improved confidence about the trajectory for the global economy.

Following the announcement of successful coronavirus vaccine trials in November, institutional investors have turned even more bearish on the US currency’s prospects on expectations that the Fed will keep its policy extremely loose even as global growth gathers pace. The dollar is considered a shelter and often rises during times of turbulence in the global economy and in other financial markets.

“The improving outlook for global growth combined with strong signals from the Fed that it will maintain loose monetary policy well into the economic recovery have been encouraging a weaker US dollar,” said Lee Hardman, a currency analyst at MUFG Bank in London.

Line chart of US dollar index showing Dollar falls to lowest level in more than two years

Central bank decisions to make monetary policy more accommodative typically weigh on the interest rates in the country’s bond market. This fall in yields often causes downward pressure on a currency such as the dollar since it makes it less appealing compared with others.

The wilting dollar has triggered strong gains this month for riskier currencies.

The euro has nudged about 3 per cent higher, climbing above $1.20 on Monday for the first time since September, when the currency was unable to find a sustained foothold above that rate. This time it is different, according to George Saravelos, head of currency strategy at Deutsche Bank, who said conditions were in place for the euro to strengthen against the slipping dollar.

Strategists at NatWest Markets expect the euro to trade at $1.25 next year as growth accelerates in Europe, leaving the US economic recovery lagging behind.

EM currencies and those with strong links to commodity markets have also powered higher against the dollar, as the more optimistic growth outlook is expected to benefit such economies most. JPMorgan economists anticipate global growth to gain pace once mass vaccination begins around the middle of 2021.

The Norwegian krone and the Brazilian real have both strengthened 8 per cent against the dollar, the South African rand has gained 5.6 per cent while the New Zealand currency has rallied 6.4 per cent in the past four weeks. Sterling, still mired in Brexit uncertainty, crept more than 3 per cent higher.

Line chart of US dollar per New Zealand dollar showing New Zealand dollar adds 6% in a month

“For many . . . emerging market currencies, it has been a November to remember,” Goldman Sachs analysts wrote in a note. “While some pause would not be unreasonable after the move, especially as we head into year-end, a longer run perspective suggests that there is still room for further appreciation.”

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