The Week Ahead: Dog days for the Dollar?

We go into the first week of August wondering how low ‘king dollar’ can go, in this Summer unlike any other. While holidays are booked and rebooked, and booked again and then cancelled, it seems any bid for the greenback is met with anavalanche of selling. In normal times, a declining dollar is typically a sign of economic optimism as other countries have decent growth outlooks. But for now, we are in different times.

The US dollar tumbled the most in a decade last month, hitting its lowest point against a basket of currencies since 2018. The near 5% drop may not sound like much compared to say Apple’s 10% move after blockbuster earnings, but that is a dramatic move in a relatively short space of time for the world’s premier reserve currency. Question marks over both the economic recovery and domestic politics have seen a new risk premium being inserted into US assets on the back of a resurgence in US Covid-19 cases. 

Let’s also not forget we need to add in curveballs like the suggestion by the POTUS to delay the November presidential election and for sure, Donald Trump’s willingness to accept the outcome of the election will be closely watched. It all adds up to a strong cocktail of headwinds for the greenback, although as is often the case when the ‘death of dollar’ is pronounced by some, we think a decisive move away the US currency has not arrived. We only need to remind ourselves of the 9% appreciation by the dollar in as many days, at the peak of the pandemic crisis earlier in the year.

This week is packed with US data, with an encouraging ISM manufacturing print to kick off the month on Monday and the scope remains solid for higher readings going forward. Much focus will be on the monthly update on the US jobs picturewhich is expected to be positive and will garner the headlines, even though the weekly initial jobless claims are more timely and stalling. It seems the jobs trajectory will be much more bumpy going forward. 

Any further news on Congress agreement to the new Phase IV fiscal stimulus package will be significant, where the $600 per month unemployment benefit boost has now expired. Delays are causing increasing concern to asset markets, which typically tend to struggle in August. 

This side of the pond sees a ‘Super Thursday’ Bank of England meeting with the release of the quarterly Monetary Policy Report. The bank is expected to remain on hold as the MPC assesses current indicators with guarded optimism tempered by the risks ahead. The key driver of sterling is the Brexit trade negotiations which appear to be at a standstill, so more clarity is probably needed for the BoE to consider if further stimulus is required. This tallies with money markets who currently price the bank rate moving into negative territory early next year.