Don't get too agitated by the dollar

Posted by: Paul Donovan

02 Sep 2020

Daily update

  • Foreign exchange dealers are simple people. They like nice round numbers. The weakening of the dollar through 1.20 against the euro has caused a level of agitation disproportionate to its economic significance. We are not in the 1970s anymore. Pricing strategies of global companies make currency moves more important to exporters' profitability, but less important to the real economy.
  • Political risk in the US is likely to remain elevated, and that promises to add a degree of volatility to the dollar. The dollar's value is driven by the willingness of foreigners to invest in the US. Foreign investors inevitably have a less nuanced understanding of political risk than domestic investors.
  • US Treasury Secretary Mnuchin believes some fiscal stimulus would not be a bad thing, and is making moves to come to terms with Congress. The loss of additional unemployment benefit at the end of July is a threat to the US economic bounce-back (and US President Trump's executive orders have, in practical terms, been almost universally ignored).
  • The Federal Reserve's Beige Book is due today. It is only a survey, but probably better quality than other surveys, and gives some insight into how consumers and companies are adapting to the crisis.

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