The US dollar is stronger following a rise in global concerns over economic growth. The Organisation for Economic Co-operation and Development (OECD) has cut global growth forecasts to 3.2%. The International Monetary Fund (IMF) cut the same forecast for 2019 from 3.5% to 3.3% in April. This has seen the US dollar rising as investors become fearful of riskier assets like stocks losing value. Yesterday, the Dow Jones, an important stock market in the US, dropped below 25,000 for the first time in 4 months.
|Currency Pair||% Change (Month)||Difference on £200,000|
A beneficiary of this was the US dollar, which is nudging 2019 highs against the pound, and 2-year highs against the Euro. Strangely, the rising prospect of US cutting rates because of this anticipated slowdown, is only helping the dollar to rise, since the global swings are causing an increase in appetite for US debt, as investors use this to ‘shield’ themselves away from fears elsewhere.
A key factor underpinning the rise of the US dollar is the fact US interest rates are the highest amongst the leading economies globally. For investors this makes the greenback a sure investment of return. When you consider UK interest rates are 0.75%, Eurozone are 0%, the 2.5% on offer by the Federal Reserve Bank (Fed) is most welcome by investors. Even if the Fed were to cut rates by 1%, which might take years, the UK and Eurozone appear destined to remain far behind.
Looking outside the Western world doesn’t offer much other opportunity with Japan on -0.1%. Australia are at 1.5% but are expected to cut sooner than later, which can be partly linked to Donald Trump and the trade wars, which have clouded the Australian economic outlook. All in all, the reasons for optimism over the US dollar seem set to remain.
GBP/USD levels are close to 2019 lows in the 1.26s on the interbank rate, having hit 1.25 in January. This is presenting a much-improved position for clients selling US dollars with pounds. Whilst it is difficult to shake the forecast for further US dollar strength the currency market is never wholly predictable.
Later today is US Gross Domestic Product (GDP) which has been an area of concern as mentioned above. Whilst the market has been viewing a weaker US economy with some relaxation, since it is still outperforming others, any signs the US itself is in trouble could still unsettle the USD.
Brexit uncertainties look set to keep GBP/USD safely below the 1.30 interbank rate for now, but clients with any future US dollar transfer might wish to make clear their requirements, so we can monitor the market for any important updates.
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