TOKYO – The investment world has seen no bigger widow-maker trade this last decade than shorting the US dollar. Yet recent volatility in the reserve currency has punters once again asking whether the great dollar reckoning is finally afoot?
No one knows, of course. The dollar’s sudden and sharp drop in recent days, though, has the whiff of exactly the sort of foreign-exchange shock for which markets have been bracing. As investors wait to see if things unravel, finally, it’s worth exploring how bad things might get.
For now, the dollar’s stumble can easily be explained by shifting considerations of interest rate differential expectations. As strategist Steven Barrow at Standard Bank puts it: “Our call for the dollar to enter a multi-year downtrend is partly based on the fact that the Fed’s tightening cycle will morph into an easing cycle, and this will pull the dollar down even as other central banks cut as well.”
