« The dollar is king but it may ultimately fall »
The US dollar surged against the world’s major currencies.
The greenback has remained one of the traders’ favourite currency to hold this year amid
high uncertainty and the divergence between the US and the rest of the world fundamentals.
But all good things must come to an end.
August 2019 looks like October 2018. After reaching high levels, equity markets corrected sharply, driving volatility indices upwards (see chart 2). Similarly, investors are concerned about the ongoing trade war between the United States and China, as well as the lack of independence of the US Federal Reserve from the Trump administration. But on closer examination, this is as far as the similarities go because this time the fears come from an anticipation of a severe economic slowdown, or even a recession. Expectations of inflation are falling, pushing down government bond rates, while 10 months ago inflation fears were driving up 10-year yields (see chart 3). As proof, the latter point to 1.73% compared to 3.25% in October 2018.
The fall in global bond yields favours the appreciation of assets that offer zero or negative returns, such as gold and the Swiss franc. Thomas Jordan reiterated that « the SNB will remain active in the foreign exchange market as necessary » to keep the Swiss franc down. But on closer examination, they have already bought CHF 36 billion in the last six months.