• The US dollar remains the key to a lot of what happens in global financial markets; a strong dollar is often a headwind to risk assets in general, notably commodities and emerging markets and vice-versa. It has been the strongest of the major currencies since 2010 but has stalled this year as US growth forecasts have fallen and the Fed has performed a sharp ‘about turn’ in monetary policy. US Treasury prices have soared, taking away some of the yield advantage that has supported the greenback for many years. The dollar still looks a pretty firm currency, though we do not expect much further strength  this year unless…
  • …currency wars break out again. In a world where GDP growth is sluggish, interest rates are already rock bottom and fiscal policy is constrained by huge debt burdens, a country having a cheap currency to boost exports is one of the few ways left to eke out some more growth. In 2010 the cheap dollar irked everyone outside America. Now the strong dollar irks Americans, and one particular American in particular who is already denouncing China and now Mario Draghi at the ECB as being ‘currency manipulators’. Ironically of course, the greater Trump pursues his trade war the more likely the dollar will strengthen and the currency of his target will weaken. Cross currents, unforeseen outcomes and confusion as always in Trumpland. 
  • Sterling as ever is a hostage of fortune to Brexit and ever since the vote in 2016 the pound has tended to fall on ‘hard deal’ or ‘no-deal’ fears, or rise on ‘soft deal’ hopes. The likely coronation of the clownish Boris Johnson as the next resident of No.10 has significantly increased the chance of a disorderly ‘no-deal’ exit on October 31st. Sterling has reacted accordingly, falling around 5% against the dollar, euro and yen since Theresa May resigned. Currently trading at £1:US$1.27 there is further likely downside to US$1.15 should a chaotic and damaging Brexit  ensue.

Summary: As we always say, forecasting currencies is a mugs game and probably more so than ever given the increasingly unpredictable economic and political environment. Whilst globally the fate of the dollar matters most to markets, we Brits are cursed with the most unpredictable currency of them all.

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