By Alun John and Karin Strohecker
LONDON (Reuters) – The dollar fell greater than 2% against other major currencies in August, marking its biggest monthly drop this 12 months and providing some relief to economies which have suffered under the load of dollar strength.
The dollar’s downtrend, which has long been anticipated, is driven by expectations that the U.S. Federal Reserve will cut rates of interest because the economy weakens.
“The dollar has been under pressure and it can remain under pressure over the rest of this 12 months,” said Guy Miller, chief market strategist, Zurich Insurance Group.
Here’s where the relief is being felt essentially the most.
1/ YEN INTERVENTION WATCH, CANCELLED
In July, traders braced for Japanese intervention to prop-up a yen that hit 38-year lows against the dollar, a headache for politicians and the Bank of Japan.
However the yen’s dramatic rebound has put an end to such intervention speculation.
One dollar is price 146 yen, down greater than 15 yen or around 10% from its mid-July levels, due to a BOJ rate hike, looming Fed cuts and a pointy reversal of popular carry trades.
“We’re not going to get a rebound in U.S. rates like we have had in previous corrections up to now two years. It is a fundamental turn and dollar/yen is heading lower,” said Derek Halpenny, MUFG’s head of research global markets EMEA.
It’s too late for Japanese Prime Minister Fumio Kishida nevertheless. He soon steps down, and the weak yen, which drove up prices, contributed to his undoing.
2/ NEVER HAPPY?
Earlier this 12 months, China tried to stop its currency from weakening an excessive amount of against the dollar, partly in fear this might drive capital outflows.
But with the yuan at its strongest since June 2023, authorities now fear further strength could cause disruption.
Its rise is essentially as a result of the dollar weakening – China’s domestic economy is fragile – however it could proceed, especially if exporters sell the hoard of dollars they’ve accrued.
“We generally expect that external developments will proceed to outweigh domestic drags, and the yuan should regularly move stronger,” said ING chief economist for Greater China Lynn Song, forecasting the dollar at 7 yuan by year-end with a fall of around 1% from current levels.
3/ BREATHING SPACE
The weaker dollar has lifted emerging market currencies elsewhere too, especially in Asia. The Philippine peso chalked up its best monthly gains in August in some 18-years and the Indonesian rupiah in greater than 4 years.
That momentum didn’t spread to Latin America, where Mexico’s peso and far of the region suffered hefty losses on domestic woes and wobbly commodity prices.
Nonetheless, a softer dollar coupled with U.S. soft landing hopes provide welcome respiratory space for some emerging markets, allowing them more room to chop rates and develop into more sensitive to domestic growth issues.
“Through the rest of the 12 months we expect central banks in Philippines, Singapore, South Africa, South Korea, Taiwan and Turkey to affix their early-cutter peers in LatAm and (central and Eastern Europe),” said MUFG’s head of emerging market research Ehsan Khoman.
4/ FROM FOE TO FRIEND
Two years ago, sterling fell to record lows, partly on political turmoil, while the euro hit parity versus the dollar – moves that exacerbated central banks’ inflation battle.
That is now modified and currency strength will likely comfort Bank of England and European Central Bank rate-setters trying to ease policy but mindful of sticky inflation in some parts of the economy.
Sterling and the euro are the highest performing major currencies this 12 months. Sterling is above $1.30, up over 25% since its record lows and the euro is above $1.10, supported by markets pricing fewer ECB and BoE rate cuts than for the Fed.
5/ CROWNING MOMENT
Sweden’s rate-setters are also likely cheering a weaker dollar.
The Swedish crown has rallied 4% in August, making it the very best performing major currency.
It also appreciated versus the euro, helping Sweden to chop rates. Last 12 months Riksbank Governor Eric Thedeen said crown weakness made the inflation fight harder.
It’s difficult for Sweden’s crown to strengthen farther from here, analysts say, however the Norwegian crown could delay higher.
Norway will likely be among the many last developed market economies to chop rates, boosting its currency and its sensitivity to global growth.
“In an environment where U.S. rates of interest are coming down, U.S. growth slows, but global growth stays stable, high beta (growth sensitive) currencies resembling the NOK (Norwegian crown) are likely to perform well,” NatWest analysts said.
(Reporting by Alun John and Karin Strohecker in London, and the Shanghai newsroom; Editing by Dhara Ranasinghe and Jacqueline Wong)