The Dollar's Resilience: Navigating the De-dollarisation Debate
The foreign exchange market's ongoing debate revolves around the de-dollarisation trend, a concept that has sparked curiosity and concern alike. This week, the US dollar's resilience takes center stage, as better economic data and the Federal Reserve's actions seem to defy the notion of a weakening greenback. Despite the ongoing criticism of Chair Powell's leadership, the dollar remains steadfast, and the latest TIC data reveals a persistent influx of foreign investment in US portfolio assets.
The Macro Move Continues
The dollar's steady ascent can be attributed to a macro-driven phenomenon. Improved US economic indicators, such as retail sales and jobless claims, coupled with the Fed's Beige Book's optimistic outlook on economic expansion, have investors adjusting their expectations. The Fed's terminal rate for the easing cycle has been raised by 5 basis points this week, marking a 32 basis point increase from October lows. As a result, the DXY index, a measure of the dollar's strength, is gently rising with low volatility.
TIC Data: A Foreign Investment Story
The release of US Treasury International Capital (TIC) data for November provides further insight into the dollar's resilience. Foreigners continue to invest heavily in US assets, with net foreign purchases reaching approximately $100 billion per month in November, compared to $25 billion in the summer of 2024. Equities accounted for 45% of the large private sector inflow, and even the foreign official sector contributed by buying $23 billion worth of equities. While the BRICS official grouping is still shedding Treasuries, private sector flows dominate, indicating a prolonged de-dollarisation process.
Factors Influencing the Dollar's Trajectory
For the dollar to weaken this year, a dual approach is necessary. Lower US interest rates and increased foreign hedging of US assets are the catalysts. The market's current tranquility suggests no immediate concerns for the dollar, but potential interventions to sell USD/JPY and USD/KRW near specific levels could introduce volatility. The US Treasury's support for such interventions adds a layer of complexity to the dollar's future.
EUR: Carry Trade Funding
The euro, a funding currency for carry trades, is experiencing low volatility near 5% for EUR/USD. Investors prefer funding carry trades out of the euro, which costs just 2.00% in implied yield, compared to 3.55% for the dollar. This preference for the euro as a funding currency may be seen as a safer alternative to the yen, where USD/JPY volatility is higher at 8.5%. The eurozone's sparse data calendar suggests a potential drift towards 1.1555/65 for EUR/USD.
JPY: Political Uncertainty and Intervention
The Japanese yen faces a complex scenario due to political uncertainties. The dissolution of the lower house and the upcoming snap election on February 8th could impact the yen's trajectory. The Liberal Democratic Party's (LDP) performance will determine the likelihood of looser fiscal and monetary policies, which could be yen-negative. However, the opposition's potential for stiffer resistance and the possibility of joint Fed-BoJ intervention to sell USD/JPY add layers of volatility to the yen's story.
PLN: Cutting Cycle and Market Outlook
The National Bank of Poland's press conference confirmed the continuation of the cutting cycle, despite unchanged rates on Wednesday. The governor's openness to a longer pause until April leaves room for various scenarios. The terminal rate could be 3.50%, but lower numbers are not ruled out. The market's dovish reaction to the conference suggests a potential return to previous lows near 3.30%. The PLN's weakness is expected as liquidity returns, with the market targeting 4.220 due to the NBP's recent message.
Disclaimer
ING has prepared this publication solely for information purposes, irrespective of individual users' means, financial situations, or investment objectives. It does not constitute investment recommendation or advice and is not a substitute for professional financial, legal, or tax guidance. Readers are encouraged to consult the provided links for further details.
