Dollar Takes Helm of Global Markets After Worst Week Since 2008

  • Reports showing slower growth help keep Fed policy on hold
  • Overseas stocks fall while commodities, EM currencies rally

The dollar is plunging so far, so fast, its shockwaves are reverberating far beyond the $5.3-trillion-a-day foreign-exchange market.

The greenback plunged the most this week since 2008 versus the yen after economic reports trailed forecasts, damping the outlook for growth as Federal Reserve policy makers await evidence needed to justify more interest-rate increases. The U.S. currency has eroded more than half its 9 percent surge last year, with one measure of dollar momentum approaching a level that indicates to some analysts that it is oversold and set to reverse direction.

The dollar’s dive has hurt investors in international stocks, boosted the price of dollar-denominated commodities and higher-yielding assets in emerging markets, and complicated the task of central banks around the world that need weaker currencies to boost their economies. Investors are increasingly unconvinced that growth in the U.S. can make up for a slump elsewhere. A slate of reports scheduled for release next week, including a monthly payrolls release, may add to their qualms.

“Any time that you’ve got a major reserve currency like the dollar falling, you tend to get a bid to other stores of value,” said William Northey, who helps oversee $125 billion as chief investment officer in Helena, Montana for U.S. Bank’s private client group. “From a broader capital markets perspective, there’s a couple of real benefits to the cessation of the dollar strength.”

The U.S. currency tumbled 4.7 percent this week to 106.50 yen, the largest drop since October 2008. It lost 2 percent to $1.1451 per euro. The Bloomberg’s Dollar Spot Index slumped 2 percent, the most in more than a year, after touching its lowest level since May 2015.

Hedge funds and other large speculators extended bets on dollar weakness after turning net bearish on the currency versus eight peers for the first time since 2014 last week.

Dollar Impact

European equities had their worst week since February as a euro rally damped earning expectations. Commodities capped their best month since 2010, while emerging-market currencies rose a third straight month -- their longest winning streak since mid-2014.

Only last year, an ascendant dollar promised to foster growth around the world by helping lift Europe and Japan out of years of slow growth, even as it sapped domestic inflationary pressures and hurt corporations at home. Now, with the U.S. currency reversing, both those benefits and disadvantages are coming undone.

“On the margin, it is a net positive for corporate balance sheets and earnings, and that’s a fair statement with respect to commodities and even some of the inflation metrics,” said Chris Molumphy, chief investment officer of Franklin Templeton’s fixed income group in San Mateo, California. “But we’re cautious not to read too much into the recent dollar weakness. We see the shorter-term impact, but we’re cautious not to give too much long-term credence to that trend.”

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