King Dollar Defies the Doubters as the U.S. Provides Investors an ‘Oasis’

(Bloomberg) -- The dollar is defying predictions it would lose its currency crown in 2019.

A gauge of greenback strength compiled by Bloomberg climbed to its highest level this year as most major currencies lost ground against the dollar. U.S. data later this week are expected to show the world’s largest economy is humming along and the rally in the dollar comes as American stocks trade around record highs and investors pile into Treasuries. At the same time, the picture in other major developed economies from Europe and Canada to Australia is looking gloomier.

The greenback is outperforming most of its major counterparts and the Bloomberg Dollar Spot Index, which measures it against a basket of developed and emerging-market peers, on Wednesday climbed to its highest level since December. It’s up around 0.9 percent this year. While the Federal Reserve has tempered its hawkish outlook in recent months, other central banks are looking even more cautious. A sharper-than-anticipated slowdown in the euro area and subdued inflation have fueled bets the European Central Bank will need to keep interest rates lower for longer, while the Bank of Canada on Wednesday abandoned its rate-hike bias.

“The U.S. has the more dynamic economy,” Axel Merk, president of Merk Investments in San Francisco, said by phone. Concern about weaker global data “makes for a stronger dollar,” he added.

Higher-yielding U.S. debt is also luring investors to the dollar. While the rate on 10-year Treasuries fell more than four basis points on Wednesday to around 2.52 percent, it’s still the highest among major developed-market peers. Comparable yields in Germany and Japan are below zero, while Australia’s and Canada’s are stuck below 2 percent.

A separate gauge of the greenback that’s widely watched by traders, Intercontinental Exchange’s Dollar Index, on Wednesday surged to its highest level since 2017. The index is tied to developed market peers of the greenback and is heavily weighted toward the euro. It has risen about 1.9 percent this year and is poised to close above a level that it’s stalled near a number of times in the past six months.

“The U.S. seems almost like an oasis,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. “The impression increasingly arises that the U.S. economy is decoupled from the rest of the world, certainly from the European economy.”

The greenback was labeled King Dollar in 2018 as it resumed a multi-year rally, though many analysts expected that to abate as the Fed rowed back on plans to continue hiking rates. While traders are currently pricing in a rate cut from the U.S. central bank, that may change if annualized growth figures for the first quarter that are due on Friday eclipse the median forecast of 2.2 percent. Other American data this week include durable goods orders, initial jobless claims, and the University of Michigan’s sentiment report.

Meanwhile, Europe’s weakening economy is hindering the euro. An unexpected decline in German business confidence sent the shared currency below $1.12, a key level. Australia’s dollar is falling on expectations the country’s central bank will cut rates, while the Bank of Canada on Wednesday laid out a more dismal growth forecast for this year than economists are expecting. The dollar has also been boosted by news that U.S. and China negotiators plan to have a draft trade agreement by the end of next month.

Trader bets on the euro gaining are falling out of fashion in the options market, while demand for protection from a further slide in the Australian dollar has risen. Still, some currency analysts remain skeptical on the dollar rally’s prospects.

“It seems to be less about dollar strength and more about currency weakness elsewhere,” said Ned Rumpeltin, the European head of currency strategy at Toronto-Dominion Bank in London. “The dollar is good enough, but we don’t think it offers a particularly compelling bullish case on its own merits.”

For now, many traders are convinced the greenback is the best game in town.

The dollar is “a place to park if you’re nervous,” Jim Paulsen, chief investment strategist at Leuthold Group, said by phone. “It reflects fear -- to some degree.”

To contact the reporters on this story: Charlotte Ryan in London at cryan147@bloomberg.net;Anooja Debnath in London at adebnath@bloomberg.net;Susanne Barton in New York at swalker33@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, ;Ven Ram at vram1@bloomberg.net, Nick Baker

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