The US Dollar: Gauging Volatility

It has become very difficult to gauge any guidance on the dollar long-term after the return to volatility and uncertainty after April. After being at its lowest in over four years, the Buck is finally dealing with volatile markets that are being driven by concern over a divergence in not just central bank policies but also economic performance.

Inflation in the U.S. remains stubborn, and while some economists try to pick items that may be showing some slight deterioration here and there, the overall picture for the U.S. includes a steadily growing Gross Domestic Product and ongoing Purchasing Managers Index surveys showing steady spending and confidence amongst consumers. That story is not entirely shared with the rest of the world, particularly with Europe.

Germany, the strongest of the Euro-zone economies, has dealt with recessionary pressures, as have other member nations that were crippled in their ability to spur growth after coping with the very negative effects of losing Russian energy imports and a Mideast region in havoc only exacerbating already disturbed trade lines that kept major materials as well as finished products very expensive. Unlike the U.S., the European leadership has a stimulus mentality, and recent data points have demonstrated some improvement based on already tried domestic fiscal as well as continental aid.

China’s potential return to a friendlier environment in which it tries to cooperate more with the U.S. and has less friction could bode well for the shared currency as it can also be uplifted by a global growth narrative.? While the Euro-zone has decoupled a bit from all Chinese business deals, 2023, characterized by tensions, is trying to be left behind. We believe that euro prospects for appreciation are questionable if central bank measures work slowly, but the likelihood of the European Central Bank succeeding in promoting an accommodative environment may not crush the shared currency. In Emerging-Markets for example, going “dovish” after hitting record-high borrowing costs is not making LATAM currencies such as Colombian pesos and Mexican pesos that awfully weaker.

After having reached its highest level against the USD since 2015, the Mexican Peso has lost momentum. April has meant a few steps back, with losses amounting to 3.44% in value for the month. Much of the rally for the Buck is due to lowered chances of the Fed cutting into its interest rates while the rest of the world stagnates. Nearshoring, the phenomenon that took away direct business and trade from China to Mexico post-pandemic and after tariff disagreements, has made MXN more attractive as it has given room for income and productivity to rise.

AMLO, the president, is leaving this June, and elections look contentious for his to-be successor, Claudia Sheinbaum. ?A push for last-minute reforms has created some political turbulence, but we have yet to see if getting closer to the voting date will translate into a downward spiral for MXN. We will monitor closely how calls of “rigging” votes could put a negative spotlight on elections as it has become an element to watch out for in recent democratic exercises worldwide.

Thus far, the peso has lost only 1.0% of its value for the year, while the euro is closer to 2.0% in damage. This year, the story that has dominated FX is how speculation over how the Fed would be ready to provide easing has faded. With data also showing the U.S. at an advantage over its peers, the natural resurgence of the Buck has been merited. Not all is entirely clear, though, as we must consider how an accommodative financial state can bring other currencies forward. If, and that is indeed if, we make progress towards negotiations in Russia and diplomatic solutions instead of hot warfare in the Middle East, the Buck could lose some of the complementary safe-haven appeal that has carried it.

Additionally, the Dollar could be dented if the Fed makes some turnaround and delivers a cut. Currently, the U.S. is in a very privileged position that traders cannot ignore, and forecasts must be tuned to ever-changing moods week after week.

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