The US dollar has become a safe haven investment thanks to America’s strong economy, and has risen further in value as investors look for resilient investments amid the global coronavirus outbreak.
The outbreak, now a global health crisis, has seen investors put money into safer bets, including the dollar, as well as gold and US Treasury bonds.
“There is a cocktail of factors supporting the dollar at the moment,” wrote Win Thin, global head of currency strategy at Brown Brothers Harriman. These include positive sentiment towards the US stock market and expectations that the virus’s impact will be relatively smaller in the United States.
The market also is pricing in a win for President Trump in November and no interest rate cuts from the Federal Reserve in the near term, Thin added.
The greenback is helped by continuing weakness in the euro, its main rival, as currencies trade in pairs: when one goes up, the other goes down. Relative to the US economy, European growth has been lagging.
But there’s a downside to a strong dollar.
Multinational US companies could feel some pain as profits in foreign currencies could shrink given the dollar’s strength. The next earnings season could be ugly for some parts of corporate America.
One sector particularly plagued by this dynamic is tech, including blue chip stocks like Apple, which last year blamed the dollar’s strength for a drag on its earnings.
Conversely, this dynamic is one reason companies that generate most of their earnings in the United States — and therefore in US dollars — tend to perform better when the dollar is on the upswing.
The ICE US Dollar Index — a popular tracker of the currency that measures it against six others — has climbed more than 2.5% this year, rising to its highest level since October. That’s a whopping performance, given the index only rose 0.2% in all of 2019.
“Apart from benefiting from its status of a safe haven, the dollar is also supported by the ongoing expansion of the US economy,” which is why traders last week increased their net long positions in the currency, wrote Piotr Matys, senior emerging markets currency strategist at Rabobank, in a note.
“The US’s comparatively low net dependence on global trade means that it may be relatively insulated from the ongoing growth shock from coronavirus,” wrote Matt Weller, global head of market research at GAIN Capital.
For the time being, however, the greenback’s strength remains largely unchallenged, as the effect of the virus outbreak on the Chinese and global economy cannot be adequately evaluated yet.