The early stages of the COVID-19 crisis saw a rising dollar as investors withdrew money from emerging markets and moved it to a “safe haven”. This initial rise against the major traded currencies has now largely unwound. From its high point in March, the value of the US dollar has declined by around 10% against the euro, 14% against the British pound and 4% against the Japanese yen. Despite effectively operating under a managed peg, the dollar has also weakened slightly against the Renminbi in recent weeks.
After collapsing in the first quarter of the year, the currencies of many significant minerals exporting countries have also rebounded strongly. Most notably, the Australian dollar has risen by 24% since late March and is currently trading above its start-year level. Other minerals exporters with deeper underlying economic issues have, however, not seen the same bounce. The exchange rates of Brazil, South Africa and Russia have notably all lagged behind.
Excitement and some concern about a falling dollar need to be tempered with the fact that it remains elevated on a historical basis and is well above its “purchasing power parity” rate. A degree of reversion was inevitable at some point and the fact that recent declines largely represent an unwinding of gains made earlier in the year – during a period of huge global risk and uncertainty – could be seen as an encouraging indicator.
However, recent falls in the dollar have been driven more by concerns over a resurgence of COVID-19 cases in the USA and possible political ineptitude in managing the pandemic, rather than any better than expected economic data in other economies, apart from China. US GDP in Q2 was down 32.9% on an annualised q-o-q basis and 10-year US Treasury yields have declined to a record low of 0.56%, suggesting a prolonged period of low interest rates will be required to support the economy. The return on 10-year Treasuries in real terms is now significantly negative at -1.0%.
The value of the dollar is a fundamental driver for most commodity prices. This link is most evident for gold and its price has recently breached $2,000/oz for the first time in its history. Gold differs from other commodities though in that demand for it is primarily as an investment vehicle influenced by factors such as perceptions of global risk, speculative demand and returns on competing investments more than movements in industrial production. The stronger dollar does not yet warrant making significant changes to other commodity price forecasts.