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Latin American currencies strengthen amid global instability
Latin American currencies strengthen amid global instability

UPI

time2 days ago

  • Business
  • UPI

Latin American currencies strengthen amid global instability

'The dollar once accounted for nearly 90% of global trade; today, it's below 70%. It's still high, but it shows the dollar has lost some of its exclusivity,' an economist said. Photo by John Guccione/ Pexels July 18 (UPI) -- Latin America's major currencies gained an average of 6% against the U.S. dollar in the first half of the year. Countries that include Brazil, Mexico, Colombia and Peru saw their currencies strengthen amid global economic and political tensions. The Brazilian real rose more than 11% this year. The Mexican peso followed with a gain of nearly 9%, while currencies such as the Peruvian sol and Chilean peso also posted increases, according to JPMorgan Private Bank. Analysts say this is not just about a weakening dollar. "The strengthening of some Latin American currencies also reflects that several countries have managed to appear more reliable to international investors," Paraguayan economist Víctor Pavón said. But this strengthening is double-edged. According to Daniel Correa, chief economist at DCR Economic and Financial Consulting, a stronger currency can become a problem if not managed carefully. "The appreciation could dampen future growth prospects, particularly in a context of stalled trade, inflationary pressures and broader economic uncertainty," Correa said. Correa also warned that "strong growth needs could be undermined by scenarios in which local economies become relatively more expensive." "It's difficult to expect this to continue for long, given the impact on export growth In a scenario of rising commodity prices and ongoing supply chain disruptions. The supply of foreign currency is likely to decline, increasing the risk of depreciation in the medium term," Correa added. Economist Federico Sosa shared that concern. "This can reduce export profitability, especially in sectors like agriculture, livestock and manufacturing, where contracts are set in dollars," he said. Sosa also noted that a stronger currency can encourage imports, putting pressure on local producers. Still, he said, there are positive effects: It helps lower inflation and improves the country's ability to repay foreign debt. In Brazil, Mexico and Peru, central banks have moved quickly to contain external shocks and maintain a degree of internal stability. According to JPMorgan, that timely response could help sustain currency stability in the coming months, though it may not be enough to keep the upward trend going. Global dynamics also play a role. Pavón noted that the U.S. dollar, which for decades dominated international trade, has gradually lost ground. "The dollar once accounted for nearly 90% of global trade; today, it's below 70%. It's still high, but it shows the dollar has lost some of its exclusivity," he said. Economist Víctor Raúl Benítez said he sees the dollar's decline as part of a deliberate strategy. "The Trump administration is willing to tolerate a weaker dollar -- and even a mild recession -- to regain global competitiveness against China. This is part of an economic realpolitik strategy aimed at preserving the dollar's role as the world's reserve currency," he said.

The U.S. dollar's decline has room to run, but the AI boom could stop it
The U.S. dollar's decline has room to run, but the AI boom could stop it

Yahoo

time24-06-2025

  • Business
  • Yahoo

The U.S. dollar's decline has room to run, but the AI boom could stop it

Many on Wall Street believe the greenback's decline has been a long time coming, and shorting the dollar has become one of the world's most popular trades. Foreign equities tend to outperform U.S. stocks when the dollar is weaker, but the AI trade may continue to fuel demand for American assets. Betting against 'American exceptionalism' hasn't paid well for over a decade. The dollar's big drop this year might change that. Many on Wall Street—and in the White House—believe the greenback's decline has been a long time coming. Heading into 2025, American currency had appreciated more than 50% from its lows during the Great Financial Crisis, according to JPMorgan Private Bank, and dollar strength helped U.S. stocks become the envy of the world. A weaker greenback now appears to be giving foreign equities a chance to catch up. But with America still the primary hub of the AI revolution, at least for now, U.S. assets could be primed to buck historical trends and snatch the lead right back. Still, President Donald Trump's chaotic tariff rollout may have ushered in a new era for the dollar. Earlier this month, it was down 10% year to date against the basket of currencies in the famous DXY index. That's the steepest loss for the greenback in the first half of the year, per Reuters, since 1986, shortly after the U.S. and several allies had reached an agreement, known as the Plaza Accord, to devalue a wildly overpriced dollar. And while there has been a slight recovery amid the conflict between Iran and the Israel-U.S. alliance, investors haven't come close to making up for the exodus since 'Liberation Day' in early April. That suggests the so-called 'Sell America' trade still has legs, Bill Sterling, global strategist at GW&K Management, told Fortune last week. 'In the scheme of things, there's ample room for the dollar to decline further,' said Sterling, formerly the chief international economist at Merrill Lynch. If tariffs continue to weigh on America's growth outlook, U.S. assets become less appealing. And while it doesn't seem the dollar will be replaced as the world's reserve currency anytime soon, it may no longer command the same amount of confidence. Over the last few decades, Sterling noted, foreigners have funded America's exploding deficit by purchasing U.S. assets, whether that be stocks, Treasury bonds, dollars, and the like. While the GOP's 'Big, Beautiful' spending bill doesn't seem poised to change the national debt's trajectory, it does include provisions set to hike taxes on foreign capital from several key trading partners. 'At a time when we have a deficit-to-GDP ratio of 7% and need foreign capital to help fund that deficit,' Sterling said, 'to be actively considering measures to discourage capital inflows is almost a recipe for a weak dollar.' In his view, rapid policy shifts in Washington have prompted a long-awaited correction to an overvalued dollar. He and many others point to purchasing power parity, a framework that assumes exchange rates, in the long run, should allow a given amount of money to purchase the same amount of goods and services in any country. Popularized by The Economist's Big Mac Index, there are plenty of reasons why this concept often doesn't play out in the real world. Data from the International Monetary Fund showed the dollar was 105% overvalued on a purchasing power basis last year, topping previous peaks in 1985 and 2002, Sterling wrote in a recent research note. However, such an imbalance can't exist forever, he said, and the ball may now be rolling. According to Bank of America's monthly fund manager survey, shorting the U.S. dollar has become one of the world's most popular trades—but over 60% of respondents still said the greenback is overvalued. 'And once a trend gets established,' Sterling said of currency markets, 'it can sometimes feed on itself.' If the dollar's decline persists, it will have major implications for economies around the world—and Americans' stock portfolios. Since the Global Financial Crisis, U.S. equities have far outperformed the rest of the world. Foreigners have responded by pumping money into America and now own 18% of the U.S. stock market, according to Apollo chief economist Torsten Sløk. Those trends could reverse, however, if dollar weakness pushes investors to allocate more money elsewhere. When Americans purchase foreign stocks and see the greenback decline, Sterling noted, their returns can get a significant boost. Meanwhile, Trump-fueled trade tensions seem to be forcing both developed countries (like Germany) and emerging economies (such as China) to focus on stimulating domestic demand, he said, something equity markets tend to reward. He pointed out how Japanese markets responded to the Plaza Accord, which caused the yen to surge dramatically against the dollar. 'That was considered kind of a hammer blow to its export industries,' he said. 'But the Japanese stock market was one of the strongest markets in the world in the entire second half of the [1980s] because they brought interest rates down very aggressively.' The comparison may be timely with several voices in the Trump administration, including Vice President JD Vance and key economic advisor Stephen Miran, previously making the case for a weaker dollar to boost the competitiveness of U.S. exports. Miran has even talked about a potential 'Mar-a-Lago Accord' to orchestrate another devaluation of the greenback. That type of deal might be unrealistic, but currency markets look like they are doing the work themselves. In the meantime, many foreign stock markets are more than weathering tariff uncertainty. Hong Kong's Hang Seng Index, for example, is up over 20% this year, compared to the nearly 3% gain for the S&P 500 year-to-date as of Monday's close. The S&P Latin America 40, meanwhile, has quietly surged by 20%. Sterling acknowledges a massive caveat to his argument about a weakening dollar, however. There's plenty of optimism—perhaps well placed, he added—about the AI trade, which many believe is still in its early stages. It would be shocking if American leadership in that space disappears anytime soon, regardless of what happens with U.S. trade and economic policy. That means investors will need plenty of dollars, preventing the greenback from falling precipitously. 'Maybe U.S. exceptionalism is still the main story in the global economy for the next five years,' he said, 'even though the tariffs and all the related sort of policy measures that have diminished U.S. standing have taken us from being hyper exceptional to merely exceptional.' But tech leadership hasn't always guaranteed superior equity returns, especially when the dollar is relatively weak. From February 2002 to July 2011, the MSCI EAFE index, covering large and mid-cap companies in developed markets outside North America, nearly doubled in value, Sterling noted. The S&P trailed significantly, gaining just over 40% in that span. This story was originally featured on Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data

Israel-Iran conflict highlights dollar's tarnished safe-haven appeal
Israel-Iran conflict highlights dollar's tarnished safe-haven appeal

New Straits Times

time17-06-2025

  • Business
  • New Straits Times

Israel-Iran conflict highlights dollar's tarnished safe-haven appeal

A dramatic spike in the potential for all-out war between Israel and Iran would typically be expected to spark an immediate and strong rally in the US dollar, with investors seeking the safety and liquidity of the world's reserve currency. That didn't happen on Friday. The dollar's response to Israel's strikes on Iranian nuclear facilities and military commanders, followed by Teheran's initial threats and retaliation, was pretty feeble. The dollar index, a measure of the currency's value against a basket of major peers, ended the day up only around 0.25 per cent. To be sure, the dollar fared better than US stocks or Treasuries, which both fell sharply on Friday. But with oil surging over seven per cent and gold up a solid 1.5 per cent, a strong 'flight to quality' flow would have lifted the dollar more than a quarter of one percent. The US currency's move was particularly weak given the dollar's starting point on Friday. It was at a three-and-a-half year low, having depreciated 10 per cent year to date, with sentiment and positioning heavily bearish. Yet a significant geopolitical shock generated barely a knee-jerk bounce. For comparison, the dollar rose more than two per cent in both the first week of the 2006 Israel-Lebanon War and in the week following Israel's invasion of Southern Lebanon last year. The dollar's weak response to this latest Middle East conflict supports the narrative that investors are now reassessing their high exposure to dollars, in light of some of the unorthodox policies put forward by US President Donald Trump in recent months. The dollar was down slightly early on Monday, and gold and oil were giving back some of Friday's gains too, as markets regained a foothold at the start of a busy week packed with key central bank meetings. The dollar has historically been one of the best hedges against short-term volatility sparked by geopolitical risk, behind gold and on a par with oil, according to research published last year by Joe Seydl, senior markets economist at JP Morgan Private Bank. Indeed, a Journal of Monetary Economics paper from last year stated plainly, "The dollar is a safe-haven currency and appreciates when global risk goes up," a trend resulting from the "fundamental asymmetry in a global financial system centred around the dollar" built up over the course of several decades. That latter part of that argument hasn't changed. The dollar accounts for almost 60 per cent of the world's US$12 trillion FX reserves, with its nearest rival, the euro, accounting for around 20 per cent. Almost two-thirds of global debt is denominated in dollars, and nearly 90 per cent of all FX transactions around the world has the greenback on one side of the trade. That means traders, financial institutions, businesses, consumers and governments still need to be more exposed to dollars than any other currency, even if they question the direction of current US policy. However, the dollar's downside 'structural' risks are growing, analysts at Westpac noted on Sunday, as concern over Washington's fiscal health and policy uncertainty erode the dollar's 'safe-haven identity'. Investors are now looking to hedge their large dollar exposure more than ever. If this dampens their instinctive demand for dollars in periods of sudden geopolitical tension, uncertainty and volatility, then the so-called 'dollar smile' theory could be challenged. This 'smile' is the idea that the dollar appreciates in periods of financial market stress as well as in 'risk on' periods of strong global growth and investor optimism, but sags in between. This idea was first outlined over 20 years ago by then currency analyst and now hedge fund manager Stephen Jen. If the Israel-Iran conflict continues to escalate, that dollar smile could get rather lopsided.

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