The dollar has endured a third week of selling, pushing other currencies to multi-year highs, as investors ramp up wagers vaccines will pave the way for a global economic recovery next year.
The US currency has shed 1.2 per cent against a basket of its peers over the past seven days, bringing its decline for the year to more than 6 per cent. It is trading at its lowest level since April 2018.
Investors have shifted away from the haven dollar as they have turned more hopeful that vaccine breakthroughs will lift the world from its pandemic-induced malaise by the middle of next year.
“Vaccines are good for the world but are bad for the dollar,” said Kit Juckes, a currency strategist at Société Générale.
At the same time, expectations the Federal Reserve will keep its monetary policy highly accommodative for years to come even as expectations for inflation build up has dented the allure of holding American bonds.
The dollar’s weakness has prompted a broad rally in other developed market currencies and their riskier emerging market peers.
The euro has gained a foothold above $1.21, its strongest in more than two-and-a-half years. Currencies with links to commodity markets pushed to similar highs with the Australian and New Zealand dollars both trading at their strongest since 2018 as the soggy dollar and rising copper and iron ore prices gave them a boost. The dollar also slipped 2 per cent against the Russian rouble and more than 3 per cent against the Brazilian real in the first week of December.
The UK pound, which continued to be mired in Brexit-related uncertainty, has pushed to a new 2020 high above $1.35.
Investors foresee further pain for the US dollar, with one major investment bank forecasting a fall of a fifth next year in its trade-weighted value. Traders shrugged off disappointing US jobs data on Friday even though weaker than expected figures would typically spur some safety-seeking bets and nudge the dollar higher.
The rapid rise in some currencies is becoming a headache for central banks, including the European Central Bank, spurring some pushback from policymakers over the appreciation of their currencies.
Investors widely expect ECB president Christine Lagarde to discuss the euro next week at the central bank’s last rate-setting meeting and the subsequent press conference.
For many EM currencies the vaccine boost has been substantial and analysts say gains in the near-term should continue. Luis Costa, a currency strategist at Citigroup, said while markets remained “under the spell of extreme bullishness” riskier currencies in EMs should continue to benefit.
“We remain of the view [that riskier] currencies may do better in this environment . . . signifying a great deal of optimism on emerging markets currencies at least over the next month or so,” Mr Costa said in a research note.
Bipan Rai, North America head of currency strategy at CIBC said the move lower in the dollar this year represented a correction in the exchange rate from overly lofty levels. As investors shed their dollars in search of better returns, currencies such as the Mexican peso should appreciate.
“The best place to be [to benefit from a correction in the dollar] is in the EM space,” Mr Rai said.