By Alan John and Karen Strohecker
LONDON (Reuters) – The dollar fell more than 2 percent against other major currencies in August, its biggest monthly decline this year, providing some relief to economies that have suffered under the weight of a strong greenback.
The dollar’s long-awaited 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 Jay Miller, chief market strategist at Zurich Insurance Group.
This is where we feel most comfortable.
1/ Yen intervention control, cancelled
In July, traders braced for Japanese intervention to support the yen, which hit a 38-year low against the dollar, a headache for politicians and the Bank of Japan.
But the yen’s dramatic recovery has put an end to such speculation of intervention.
The US dollar fell to 146 yen, down more than 15 yen or about 10% from mid-July levels, thanks to interest rate hikes by the Bank of Japan, impending rate cuts by the Federal Reserve and a sharp reversal in carry trades.
“We are not going to see a rebound in US interest rates like in previous corrections over the past couple of years,” said Derek Halpenny, head of global markets research for EMEA at MUFG. “This is a fundamental shift and the dollar/yen is heading lower.”
But it was too late for Japanese Prime Minister Fumio Kishida. He soon resigned, and the weak yen, which led to higher prices, was his downfall.
2/ Never happy?
Earlier this year, China tried to prevent its currency from weakening too much against the dollar, in part because it feared it would lead to capital outflows.
But with the yuan at its strongest since June 2023, authorities now fear further strength could lead to unrest.
The Chinese currency’s rise is largely due to the weak dollar – China’s domestic economy is fragile – but the rise could continue, especially if exporters sell off the dollars they have accumulated.
“We generally expect external developments to continue to outpace domestic factors, and the yuan should gradually appreciate,” said Lin Song, ING’s chief economist for Greater China, predicting the dollar could reach 7 yuan by the end of the year, a decline of about 1% from current levels.
3/ Space to breathe
The dollar’s weakness has also lifted emerging market currencies elsewhere, particularly in Asia. The Philippine peso had its best monthly gain in August in about 18 years, and the Indonesian rupiah had its best gain in more than four years.
But this momentum has not spread to Latin America, where the Mexican peso and most countries in the region have suffered heavy losses due to domestic problems and volatile commodity prices.
However, the weaker dollar coupled with hopes of a soft landing in the US economy is providing some emerging markets with welcome breathing space, allowing them more room to cut interest rates and increasing their sensitivity to domestic growth issues.
“Over the rest of the year, we expect central banks in the Philippines, Singapore, South Africa, South Korea, Taiwan and Turkey to join their counterparts in Latin America and Central and Eastern Europe in cutting rates early,” said Ehsan Khoman, head of emerging markets research at MUFG.
4/ From enemy to friend
Two years ago, the pound fell to record lows, partly due to political turmoil, while the euro reached parity against the dollar — moves that exacerbated central banks’ inflation battle.
But that has now changed, and the strength of the currency is likely to be a relief to policymakers at the Bank of England and the European Central Bank who are looking to ease monetary policy but are mindful of persistent inflation in parts of the economy.
The pound and the euro are the best performing major currencies this year. Sterling is above $1.30, up more than 25% since record lows, and the euro is above $1.10, supported by markets pricing in lower interest rate cuts from the European Central Bank and the Bank of England than a Fed rate cut.
5/ The moment of coronation
Swedish interest rate makers are also likely to welcome a weaker dollar.
The Swedish krona rose 4% in August, making it the best performing major currency.
The Swedish krona has also appreciated against the euro, helping Sweden cut interest rates. Last year, Riksbank Governor Erik Theden said the weaker Swedish krona made it harder to fight inflation.
Analysts say it is unlikely that the Swedish crown will become more powerful from now on, but the Norwegian crown may hold out better.
Norway is likely to be among the last advanced economies to cut interest rates, which would boost its 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 like the Norwegian krone tend to perform well,” said analysts at NatWest.