Treasury yields flat as investors parse China-U.S. trade deal, await inflation print

As the dollar falters, the world’s central banks tread a tightrope — devalue their currency or not

 Points

  • Uncertainty about U.S. policymaking has led to a flight out of the U.S. dollar and Treasurys, with the dollar index weakening more than 9% so far this year, and analysts see more declines. 
  • The drop in the greenback has led other currencies to appreciate against it, especially safe havens such as the Japanese yen, the Swiss franc as well as the euro.
  • Currency devaluation is likely to be more of an active consideration across emerging markets, particularly in Asia, said Nick Rees, head of macro research at Monex Europe.
  • “Emerging markets face high inflation, debt, and capital flight risks, making devaluation dangerous,” said Wael Makarem, financial markets strategists lead at Exness.
U.S. one hundred dollar bills.
U.S. one hundred dollar bills.
Nurphoto | Nurphoto | Getty Images

The dollar has been sliding and the ripple effects on other currencies has brought a mix of relief and headache to central banks around the world.

Uncertainty about U.S. policymaking has led to a flight out of the U.S. dollar and Treasurys in recent weeks, with the dollar index weakening more than 9% so far this year. Market watchers see further declines. 

According to Bank of America’s most recent Global Fund Manager Survey, a net 61% of participants anticipate a decline in the dollar’s value over the next 12 months — the most pessimistic outlook of major investors in almost 20 years.

The exodus from U.S. assets may reflect a broader crisis of confidence, with potential spillovers such as higher imported inflation as the dollar weakens.

Most central banks would be happy to see 10%-20% declines in the U.S. dollar.
Adam Button
ForexLive chief currency analyst

The drop in the greenback has led other currencies to appreciate against it, especially safe havens such as the Japanese yen, the Swiss franc as well as the euro.

Since the start of the year, the Japanese yen has strengthened over 10% against the greenback, while the Swiss franc and the euro has appreciated about 11%, according to LSEG data.

Aside from the safe havens, other currencies that have strengthened against the dollar this year include the Mexican peso, up 5.5% against the dollar, and the Canadian dollar which has appreciated over 4%. The Polish zloty has strengthened more than 9% while and Russian rouble has appreciated over 22% against the greenback.

Some emerging market currencies, however, have depreciated despite the weakness in the greenback.

The Vietnamese dong and Indonesian rupiah weakened to a record low per U.S. dollar earlier this month. The Turkish lira also hit an all-time low last week. China’s yuan hit a record low against the dollar nearly two weeks back but has since strengthened. 

Breathing room to cut rates?

Barring a few exceptions like the Swiss National Bank, a weakening U.S. dollar is a relief to governments and central banks around the world, analysts told CNBC.

“Most central banks would be happy to see 10%-20% declines in the U.S. dollar,” said Adam Button, chief currency analyst at ForexLive. He added that the dollar strength has been a persistent problem for years and poses a difficulty for countries with hard and soft dollar pegs.

With many emerging market countries having large dollar-denominated debt, a weaker dollar lowers real debt burden. Additionally, a softer greenback and stronger local currency tend to make imports relatively cheaper, lowering inflation and hence allowing central banks the room to cut rates to boost growth.

The recent U.S. dollar sell-off offers more “breathing room” for central banks to cut rates, said Button. 

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