Dollar's Upswing Pounds Home a Zero-Sum Divide

In foreign exchange, there must always be a winner and a loser. A series of zero-sum games, one currency or another gains in any pair. And the market is now telling us some startling things. One is that the dollar is in an upswing, which on the face of it implies that times are bad for the global economy; the dollar generally prospers when people are risk-averse. Another is, as several people now put it, the pound is beginning to behave as though it were an emerging market currency. Not just decoupling from mainland Europe, post-Brexit Britain appears to be separating from the entire developed world.

In the case of the dollar, it is benefiting both from concerns that the latest wave of Covid-19 and China’s problems will dent global growth, and also from the perception that the Federal Reserve will need to grow more hawkish from here. As George Saravelos, foreign exchange strategist at Deutsche Bank AG, put it when slightly upgrading his forecasts for the end of the year, “persistently stagflationary dynamics — lower growth but a hawkish Fed — leave little room for a dollar downtrend.” The corollary is that if Covid-19 clears, China muddles through and reflation resumes, this latest dose of dollar strength could look like a head fake, but that is for the future.