Published: January 6th, 2020
– The Dollar’s dismal performance towards the end of 2019 continued into 2020. It seems the end year positioning, as well as the optimism generated from the prospects of the signing of the Sino-U.S. trade deal, were not motivation enough to keep the dollar price chugging. Will the prospect of war following the killing of an Iranian Major General save the greenback?
Tuesday, December 31, and the dollar is struggling amid end year repositioning and the hope of a trade deal between China and the U.S. Fast forward to January 2, 2020, and the pressure on the Greenback may be because investors are betting that the U.S. stellar economic performance could soon end.
Word on the streets was that Liu He, the top trade negotiator for China visited Washington over the weekend to pen the accord. Such talk boosts trade optimism between Beijing and Washington and lightens up the outlook for global growth.
The dollar’s tribulations and steady fall started almost as soon as the White House Trade Advisor Peter Navarro announced that the signing ceremony of the deal was nigh. By the end of December, the Greenback’s index had blown away 1.9% month-on-month.
On January 3, 2020, the currency stood at 96.44, a six-month straight low. It fell against the yuan as well, shedding a percent to stand at 6.964. Against the Japanese yen, the dollar was at 108.67, just a shade above the December low of 108.40.
The dollar’s drop could also be a result of China’s latest monetary policy initiative.
Sometime in 2019, China made known its intention to heighten the convertibility of the yuan. With the announcement on January 1, 2020, by the People’s Bank of China that it was moving to boost the economy, the market reacted. China shredded the amount it requires banks to hold as reserves. The action released some 800 billion yuan, an equivalent of $114.9 billion into the economy.
While the amount in question is not much, it will bring some change into the Chinese economy, and hopefully, globally. Besides, the amount may seem modest but it is a good indicator that the country’s leadership is watching keenly for any signs of an economic slowdown.
The dollar has been a beneficiary of the economic outperformance of the U.S. economy for much of 2019. However, with the ease in trade tensions following the agreement between Washington and Beijing, optimism is rising among other nations.
With the feeling that 2020 could be good for most countries, the dollar may continue to take a beating as the other major currencies experience a turnaround.
A lot of this year’s opening was also centered around the events of last year. The markets saw limited volatility on Thursday as traders watched for a repeat of New Year 2019. The flash crash last year was characterized by huge stop-loss selling that swept a market that had just suffered the illiquidity occasioned by the holidays.
While the dollar remains on a downward spiral, equities seem to have a different thing going on. The vast majority of the Asian Pacific markets advanced as the year began. Hong Kong, China, and Thailand, all gained 1% with only South Korea and Indonesian markets falling.
The Dow Jones Stoxx 600 shot up a percent in European trades as did the US Shares.
When analysts talk about the meaning of price fluctuations of currency, what they mean in the real sense is how the price affects market players. Take the case of the dollar, for instance, its current price slump has losers on one side and gainers on the other.
A currency’s exchange rate is a price. When the price of milk dips, families rejoice while the dairy farmers cry in anguish. The same applies to currencies. Right now, the direct winners are the U.S. companies that export their goods and services.
Tourists attractions sites such as Disney World, the tech giant Facebook, and the construction equipment and machinery manufacturer Caterpillar are some of the outright winners. This is so because their customers can now exchange their currencies for more dollars.
American consumers, on the other hand, are the losers in this scenario since they have to fork more to access foreign goods or services.
The signing of the trade deal between China and the U.S. is heralded as a gift from the world’s two biggest economies to the world. It is hoped that the deal will brighten the trade arena globally. Should that be the case then the dollar may likely lose as the other currencies strengthen from the ripple effect.
However, there are new developments almost every waking day. For instance, on January 3, 2020, a targeted U.S. drone strike killed Qasem Soleimani, an Iranian Major General in charge of the country’s extraterritorial military and clandestine operations. Because of this act, the potential of an all-out hot confrontation between the U.S. and Iran is glaringly real.
If nothing changes in the interim, the war between these two adversaries may be a lot more elaborate than the U.S.-Iraq war. Iran is bigger and has a better military than Iraq. Besides, its religious ideology is unwavering and it has a proud history and heritage. Besides, the country vehemently opposes almost all things that appear socially modern or are Americanish.
While this statement above is chilling, it weirdly is great for the prospects of the dollar, at least, shortly. The currency may just rescue its downward slide because, from the records, the prospect of war always works in the favour of the greenback.
The new year seems not to have come with anything good for the dollar. The currency kept on its downward spiral. If the trade deal between China and the U.S. brings even more prosperity, then the greenback may bleed some more. However, the landscape has been altered momentarily with the drone strike that killed an Iranian Major General. Will this signify the commencement of war between the U.S. and Iran? If it does, will that change the fortunes of the dollar? For now, the markets adopt a wait-and-see stance.