Geopolitical Tensions Weigh on Currencies

by:
Chief Portfolio Strategist, MainStay Investments
  • The U.S. dollar rose to fresh highs before subsequently losing traction, due to geopolitical tensions, sentiment shifts, and President Trump saying the dollar is “getting too strong.”
  • The Japanese yen extended gains against the U.S. dollar, as geopolitical tensions heated up.
  • Many factors have recently made predicting the direction of currencies an increasingly difficult task. The addition of geopolitical tensions will not be an exception. Currency investors will have to decipher between short-term shifts and longer-term trends.

On Friday April 7th, the dollar rose to fresh three-week highs, despite a negative employment report and a U.S. missile attack on Syria. Investors and economists alike seemed unfazed by the weak March payroll print, citing the result as a fluke – driven primarily by weather and not by a stalling economy. News of the airstrikes on Friday, however, did spark a rush into safe-haven assets, like gold and Treasurys. The dollar fell sharply against most currencies, albeit only briefly. Later that afternoon, the dollar continued a widespread climb higher, tracking the rebound in the 10-year Treasury yield. Perhaps the rebound was driven by statements from the Federal Reserve (President William Dudley on interest rates) and the White House (Gary Cohn on tax reform).

The U.S. dollar lost traction after the weekend, as investors recalibrated their expectations amid rising oil prices and geopolitical tensions. On Monday April 10th, the price of oil moved higher, due to a pipeline standoff in Libya (oil and the dollar often move inversely to each other). The dollar fell further Tuesday, as tensions heated up between the U.S. and North Korea. The yen, meanwhile, extended gains against the U.S. dollar (and all of its G-10 peers for that matter) on the same news. Surprisingly, hawkish comments from Federal Reserve Chairwoman, Janet Yellen, had no evident impact on the dollar. That Wednesday, in an interview with The Wall Street Journal, President Trump said that the U.S. dollar was “getting too strong.” The dollar subsequently fell 50 basis points in less than 15 minutes.

The direction of the U.S. dollar was long driven by monetary policy expectations. Following the presidential election in November, however, anticipated policy stimulus became an additional and complementary driver of the U.S. dollar. Bullish dollar sentiment rose very quickly, as investors welcomed a pro-growth fiscal policy agenda into the mix. Other political risks also currently weigh on currencies, including the dispute over Syria and the French presidential election. North Korea seems to be the most imminent, and newest, risk for the yen-dollar cross. The outlook is mixed, as some feel that a risk event in North Korea may cause the yen to depreciate because of Japan’s geographic proximity to North Korea. However, it is quite possible that the yen could appreciate, given its status as a “risk-off” currency. Currency investors will have to decipher between short-term shifts and longer-term trends – a formidable task.

Currency Movements Are Hard to Predict

EUR
 
JPY
 
INT’L
 
4|11 -0.65% 1.02% 0.17%
4|4 -1.29% 0.37% 0.83%
3|28 0.03% 0.53% -0.10%
3|21 1.95% 2.71% -1.86%
3|15 1.83% 0.87% -1.30%
3|7 -0.09% 1.07% 0.68%
2|28 0.38% 0.82% -0.25%
2|21 -0.40% 0.50% 0.12%

Source: Bloomberg, 2/21/17–4/11/17. EUR/USD Spot Exchange Rate where the price of 1 euro is in U.S. dollars. The calculation is the one week percentage change in spot exchange rate where a negative value is the depreciation of the euro. JPY/USD Spot Exchange Rate–price of 1 Japanese yen in U.S. dollars. The calculation is the one week percentage change in spot exchange rate where a negative value is the depreciation of the JPY. The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. A negative value indicates a general depreciation of the dollar.

The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market.

Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Charlie Reinhard

Chief Portfolio Strategist, MainStay Investments

As head of portfolio strategy at New York Life’s MainStay Investments, Charlie Reinhard leads investment thought leadership and portfolio construction efforts across MainStay mutual funds and IndexIQ ETFs

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