Investing.com – Despite recent weakness, analysts at BCA Research assert in a note dated Monday that the Saudi stock market remains resilient and is expected to rebound in the coming months.
The global economic landscape, marked by a slowdown in the manufacturing sector and increased caution in financial markets, is paving the way for a recovery in the dollar.
The US dollar may be on the decline, but according to BCA Research, it is far from out of the game.
In 2024, global financial markets are expected to see the US dollar lose some of its strength, as the broader economic environment becomes more uncertain.
The global manufacturing sector, which briefly stabilized earlier in the year, has entered a renewed contraction. This downturn is being accompanied by weakness in oil prices, two leading indicators of global economic activity.
Moreover, various sectors of global risk assets failed to break through their previous highs, indicating deteriorating global growth conditions.
Moreover, liquidity conditions are becoming increasingly tight. BCA Research notes that global dollar liquidity, defined as the sum of the U.S. monetary base and securities held by the Federal Reserve for foreign officials and international accounts, is declining.
This factor has contributed to the current decline in the dollar’s strength. But this dynamic of reduced liquidity may ultimately prove to be a boon for the dollar.
“It is worth noting that tightening global liquidity in the US dollar – which is calculated as the sum of the US monetary base and securities held by the Federal Reserve for foreign officials and international accounts – is typically positive for the dollar,” the analysts said.
This tightening is linked to global manufacturing, which is closely linked to dollar movements. As the global economy shrinks, the US dollar often acts countercyclically, rising while riskier assets suffer losses.
The current situation is somewhat similar to the bear market of the early 2000s. In the first phase of the bear market from 2000 to 2002, the US dollar rose in value as global stock markets, including emerging market stocks, sold off.
If this pattern repeats, the dollar could follow a similar path in the coming months, gaining strength during the initial stages of a bear market.
One of the main reasons why BCA Research remains positive on the US dollar is the structure of the global financial system.
The US dollar remains the dominant global reserve currency, with the majority of international transactions settled in dollars.
Moreover, in times of economic stress, investors often turn to the safe haven of US assets, which further supports the dollar.
“The trade-weighted US dollar has yet to break the lower bound of its ascending channel,” analysts said.
The currency continues to benefit from its role as a safe haven, which should support demand, especially as economic uncertainty continues globally.
Emerging market stocks and currencies are closely linked to global growth. The BCA suggests that a renewed contraction in global manufacturing is likely to drag down emerging market stocks and currencies.
A stronger US dollar could exacerbate these pressures by making it more expensive for emerging markets to service their dollar-denominated debt, further hampering their growth prospects.