Currency movements often only come to investors’ attention when they are doing something out of the ordinary, either nosediving or soaring suddenly.
The pound’s steady decline since the UK’s referendum on EU membership has reminded investors just what an impact currency can have on investment returns.
While the pound has been depreciating, the path of the US dollar has not been so clear cut in the past year.
Haven of choice
Russ Mould, investment director at AJ Bell, observes: “The dollar has done its usual thing – rise in anticipation of interest rate cuts and then sag when the increases in headline borrowing costs are actually pushed through by the US Federal Reserve.
“The DXY, or Dixie, trade-weighted dollar index has basically gone sideways for two years and, frankly, that’s a good thing: a rising dollar tends to slow global growth, as it makes commodities more expensive and servicing overseas dollar-denominated debt more costly.”
He predicts that if or when there is another global financial crisis, the US dollar is likely to be “the haven of choice” again.
Currency predictions are almost impossible to make but commentators can make some educated guesses based on the likely trajectory of interest rates – at least that’s what Rathbones’ David Coombs thinks.
He forecasts: “We believe it [the dollar] should resume its upward trend against its major trading partners in 2018, especially if the three interest rate hikes hyped by the Federal Reserve come to pass.
“Pulling the trigger on all three seems unlikely at the moment, but movements in Fed funds futures suggest that investors believe tax cuts will make tighter monetary policy more likely.”
But John Bilton, head of global multi-asset strategy at JPMorgan Asset Management, insists the days of Fed policy having any real effect on the dollar are over.
“While it is true that the US is well ahead of other regions in raising rates, it is no longer the case other central banks are rowing in the opposite direction,” he explains. “This blunts the impact of Fed policy on the dollar and leaves global growth differentials to dictate the path for the currency.”
Mr Bilton continues: “In an environment where growth relative to trends in the eurozone, Japan, and parts of the emerging markets compares favourably to the US, the dollar looks set to gradually soften.
“Valuations being less extreme than a year ago suggest the dollar’s decline will be rather more pedestrian in 2018 than it was in the first half of 2017, but the direction of travel is the same.”
Ryan Paterson, research analyst at Thesis Asset Management takes a similar view on the dollar’s direction this year.