Two tales of a weaker Dollar
As the week that should decide the fortune of the US Dollar continues to unfold, this brief looks at the two very different legacies of a weaker Dollar. For emerging markets-EM and other high beta currency classes, a weaker Dollar can both act as a tail wind and a resistance. The key to which of these two opposing forces prevails is down to sentiment and risk perception. If a USD decline is orderly and not accompanied by defensive positioning and growth concerns, then developing and export driven markets will usually experience net positive FX flows. However, if recessionary fears and (particularly equity) market volatility enters the equation, more often than not, high beta FX pairs will often show a net move in favour of the Dollar.
Analysing market sentiment is an imprecise and difficult science. However, for the purposes of identifying whether a USD decline is positive or negative for this portion of the market should be a far simpler task. Due to the high (and increasingly positive) correlation between developed market equity performance and high beta FX, we can proxy wider market sentiment with stock index performance. In turn, the growth element of the US economy will be pivotal to determine whether markets will seek opportunities to the benefit of EM FX. If they do, elements such as the carry trade in the face of a decline in developed market yields could reemerge.
So far, the much-awaited data brought to markets this week has shown a mixed picture. ISM manufacturing data was inconclusive with positive and negative deviations from prior and forecasted readings amongst the data set. Yesterday’s ADP employment snapshot was more conclusive, sending the Dollar lower. So far this week, defensive market positioning has prevailed with safe havens being favoured over a fresh allocation of risk. Based on this week alone then, EM FX will struggle to gain ground in the context of this weaker Dollar environment.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Daily Brief – Clarity
Charles Porter
Thu 20 Nov 2025
Clarity The Bureau of Labor Statistics yesterday ended speculation on the fate of data produced during the recent US government shutdown. As a result of the inability to collect key household data, notably on unemployment, it has announced that there will not be an October jobs report. Moreover, what little data that was collected in […]
Daily Brief – Back in business?
Charles Porter
Tue 18 Nov 2025
Back in business? Tomorrow will mark one week since the President’s signature was provided to end the longest US government shutdown in history. It is not uncommon for the legacy of a shutdown to drag on beyond its formal conclusion date because it can naturally take differing amounts of time for different departments to get […]
Daily Brief – Volatility on offer
Charles Porter
Thu 13 Nov 2025
Volatility on offer As we approach year end, traded ranges have remained relatively narrow despite significant macroeconomic themes developing. Looking ahead beyond year end, we note the options market continues to severely underprice volatility versus historical standards. Within such an environment, broader risk appetite remains constructive. As a result, the carry trade has continued its […]
