By Alun John and Karin Strohecker
LONDON (Reuters) -The dollar fell more than 2% against other major currencies in August, marking the biggest monthly decline this year and providing some relief to economies that have suffered under the weight of the strong dollar.
The dollar’s long-expected downward trend is driven by expectations that the US Federal Reserve will cut interest rates as the economy weakens.
“The dollar has been under pressure and will remain under pressure for the rest of this year,” said Guy Miller, chief market strategist at Zurich Insurance Group (OTC:).
This is where the relief is felt most.
1/ YEN INTERVENTION WATCH, CANCELLED
In July, traders braced for a Japanese intervention to prop up the yen, which hit a 38-year low against the dollar, causing headaches for politicians and the Bank of Japan.
But the yen’s dramatic recovery has put an end to such intervention speculation.
One dollar is worth 146 yen, down more than 15 yen or about 10% from mid-July levels, thanks to a BOJ rate hike, threatened Fed cuts and a sharp reversal in popular carry trades.
“We’re not going to have a recovery in US yields like we’ve had in previous corrections over the last two years. This is a fundamental turn and the dollar/yen is headed lower,” said Derek Halpenny, head of research global at MUFG. markets EMEA.
However, it is too late for Japanese Prime Minister Fumio Kishida. He soon resigns, and the weak yen, which pushed up prices, contributed to his downfall.
2/ NEVER HAPPY?
Earlier this year, China tried to prevent its currency from weakening too much against the dollar, partly out of fear it would spur capital outflows.
But with the yuan at its strongest since June 2023, authorities now fear further strength could cause disruption.
The rise is largely due to the weakening of the dollar – China’s domestic economy is fragile – but could continue, especially if exporters sell the wealth of dollars they have amassed.
“Overall, we expect external developments to outweigh domestic negative impacts, and the yuan to gradually strengthen,” said Lynn Song, ING’s chief economist for Greater China, who forecast the dollar towards the end of the year at 7 yuan, with a decline of about 1%. of current levels.
3/ BREATHING SPACE
The weaker dollar has also boosted emerging market currencies elsewhere, especially in Asia. The Philippine peso posted its best monthly gain in about 18 years in August, and the Indonesian rupiah in more than four years.
That momentum did not spread to Latin America, where the Mexican peso and much of the region suffered steep losses due to domestic problems and shaky commodity prices.
Still, a softer dollar, coupled with hopes of a soft landing in the US, provide a welcome breather for some emerging markets, giving them more room to cut rates and making them more sensitive to domestic growth concerns.
“We expect central banks in the Philippines, Singapore, South Africa, South Korea, Taiwan and Turkey to join their early-cutter peers in Latin America and (Central and East) over the remainder of the year -Europe),” said MUFG’s head of emerging markets research. Ehsan Khoman.
4/ FROM ENEMY TO FRIEND
Two years ago, sterling fell to record lows, partly due to political turmoil, while the euro reached parity against the dollar – moves that exacerbated central banks’ inflation battle.
That has now changed and the currency’s strength is likely to provide comfort to rate setters at the Bank of England and the European Central Bank who want to ease policy but are mindful of persistent inflation in some parts of the economy.
Pound sterling and the euro are the best performing major currencies this year. Sterling is above $1.30, up more than 25% from its low, and the euro is above $1.10, supported by markets pricing in fewer ECB and BoE rate cuts than before the Fed.
5/ CROWN MOMENT
Swedish interest rate setters are also likely to welcome a weaker dollar.
The Swedish krona rose 4% in August, making it the best-performing major currency.
The currency also rose against the euro, helping Sweden cut interest rates. Last year, Riksbank Governor Eric Thedeen said the weakness of the krone made the fight against inflation more difficult.
It’s difficult for the Swedish krona to strengthen further from here, analysts say, but the Norwegian krona could hold up better.
Norway will likely be one of the last developed market economies to cut interest rates, increasing the currency and its sensitivity to global growth.
“In an environment where US interest rates are falling, US growth is slowing, but global growth remains stable. High beta (growth sensitive) currencies such as the NOK (Norwegian Krone) tend to perform well,” NatWest analysts said.
