Every day I read Robert Armstrong’s early morning email to readers interested in US markets, every so often I find one that matters to me as a UK saver for my pension. This one matters because it reminds me that for me to get full value from the rise of US shares (now at record levels) I need a strong American dollar. Right now the dollar is weak, which made it cheap to buy my partner the Springsteen box set (very good) but bad for valuing my American stocks (not so good).
You may not think this is what matters to your money, but so long as we diversify as we do, then we are prone to whatever is happening in America. Over the past few years the dollar has strengthened and so have US equity markets, it’s been double bubble for most DC funds which are “unhedged”.
We should all understand it, unless we hedge interest rates (which to me is of benefit to the dealers and not to me- over time) then understanding markets has to include currencies. They can go in different directions and now is one of those times.
So if you see your DC pension recovering but not as fast as you’d think, this is why.
Here’s Robert Armstrong’s piece this morning about why American shares and currency are going in opposite directions and why this is “normal”
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The dollar keeps getting weaker, and has now broken though the bottom of its 2022-2025 trading range:
Your bottom dollar
ICE US dollar index
Much of the punditocracy sees this as a symptom of fiscal and monetary mismanagement by the Trump administration, which is drawing the safe haven status of the dollar into question. This, for example, comes from a piece in the FT yesterday (“US dollar suffers worst start to year since 1973”):
“The dollar has become the whipping boy of Trump 2.0’s erratic policies,” said Francesco Pesole, an FX strategist at ING.
The president’s stop-start tariff war, the US’s vast borrowing needs and worries about the independence of the Federal Reserve had undermined the appeal of the dollar as a safe haven for investors, he added . . .
And here’s an example from an FT piece from Sunday (“Donald Trump’s fiscal policy and Fed attacks imperil US haven status, say economists”):
“Fiscal deficits, deliberate government actions to shrink the US financial account and devalue the dollar, uncertainty about succession at the Fed and questions about Fed independence all negatively affect [the safe haven status of the dollar],” said Anna Cieslak at Duke University.
Unhedged doesn’t buy it. Confidence in the dollar system had a bad shock in April, after the president’s absurd Rose Garden performance on “liberation day”. But as an explanation of what is going on over the past month or so, the loss of safe haven status simply won’t do. Look at what is happening at the same time:
- 2-, 10- and 30-year Treasury yields are falling
- Inflation break-evens are falling
- Equities are hitting all-time highs
- Corporate bond spreads are back near all-time tightness
- Gold has been heading sideways (albeit at a high level) for two months
- Implied volatility of equities and bonds is low
None of this is consistent with global investors exiting US dollar assets, a witless lackey being appointed Fed chair, a horrific failure of tariff negotiations, or a spiralling deficit/rates crisis. One might perfectly well argue that the market is wrong about all these things. Markets do go through periods of being mostly wrong. But the market simply is not saying the safe haven status of dollar assets is under increasing stress.
Indeed, the opposite is closer to the truth: since the April scare, the policy outlook has become steadily less frightening. That, plus signs of a gently weakening economy, has raised expectations for Fed rate cuts and allowed long-bond yields to fall, as well. In that context, a falling dollar is normal.
