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The Macro Brief – The USD’s struggle
570 Plays10 days ago
Paul Mackel, Global Head of FX Research, looks at what’s causing USD weakness and which currencies could stand to benefit.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/rdpJ66b
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Transcript
Introduction to HSBC Global Viewpoint
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
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Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
US Dollar Weakness: Causes and Consequences
00:00:33
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This is the macro brief from HSBC Global Investment Research, the podcast that looks at the issues driving financial markets. I'm Piers Butler. On today's podcast, we're catching up on developments in the currency markets.
00:00:47
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And it's not been a good start to the year for the US dollar, with the greenback continuing to struggle. But what's behind that weakness? Could a change be coming? And which other currencies could benefit from a softer dollar?
00:00:58
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help me answer those questions, I'm joined in the studio by Paul Mackle, Global Head of FX Research. Paul, welcome back to the Macrobrief. Thank you very much. And welcome back to London. I know you've just moved back to to Hong Kong, so we're very pleased to have you in the studio today. So ah let's kick it off with the dollar. If you look at the US dollar index, which is the US dollar versus ah a basket of other currencies,
00:01:21
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Since the start of 2025, it's down over 10%. And in your latest Currency Outlook, you explained that U.S. policy uncertainty was a major contributing factor. And in sense in in some ways, we saw a kind of regime change. What do you mean by that? And is it likely to continue in 2026? Well, we've had very strong reminders since the start of this year about U.S. policy uncertainty. We've had to think about Venezuela. We've had to think about Greenland. We've had to think about who could be the next Fed chair in tariffs.
00:01:50
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And the byproduct, of course, in the currency market has been, with this uncertainty rising, the dollars weakening. And that's very much a reminder of where we were in 2025, that fundamentals didn't matter as much because the level of noise was much higher and weighing against the currency.
00:02:09
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So you talked about fundamentals. I mean, if I've learned anything from reading your research, yield differentials normally matter a lot in terms of looking at currencies. It's normally a key driver of relative exchange
Impact of US Policy on Currency Markets
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rates. Are you saying that they don't matter anymore?
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Well, there's many drivers of exchange rates, but we often look at what's happening with interest rate differentials as a barometer of relative growth or monetary policy outlooks ah between currencies. And in the context of the dollar, this interest rate differential is implying that actually the dollar should be stronger. than where it currently sits.
00:02:47
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And that difference or that differential that has been unfolding is a function of this policy uncertainty, this noise, as I just mentioned. But again, what had happened in 2025, those rate differentials didn't matter as much. They were providing a false clue in terms of what could be happening to the US dollar. In other words, there were moments of saying that the dollar should be maybe not as strong or maybe not as weak, but the market wasn't paying attention to that because it had to follow and track the noise, or at least do its best to understand it.
00:03:22
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Other currency drivers which you identify in your work are the foreign holdings of US assets and hedging activity. How much of a factor is that likely to be in 2026? I mean, you see headlines in the press about people starting to worry about having so many assets in dollar denominated assets.
00:03:40
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Absolutely. It's another big talking point again. And it was a reminder of where we were in the second quarter of 2025, when, again, the narrative was very strong that foreign investors were covering their dollar exposures. Perhaps they were at times reducing some of their holdings of U.S. assets. It didn't turn out to be entirely true, but there were moments of that.
00:04:04
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But the reality is, is that This narrative has been coming back. But what is it associated with? Again, it comes down to this policy uncertainty. And is it making investors think differently once again about the dollar? Seemingly, that is the case.
00:04:19
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So could you argue that in a way we had a lot of policy uncertainty in the new Trump administration and in a way this year is kind of saying it's continuing and that's starting to embed
US Dollar as a Soft Currency for Funding
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itself?
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Yes, is the answer. It's a very, very simple answer in my eyes because, you know last year there were big moments of when we had to pay so much attention about what the steps could be on tariffs and the impact on the U.S. economy and other economies. That noise eventually calmed down to a certain degree. in the late third quarter and into the fourth quarter. But again, it's come back and it's come back to haunt us and it's coming back to haunt the dollar.
00:04:55
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So in your report, you conclude that all of these factors are likely to keep the U.S. dollar in the quote unquote funding bucket. What do you mean by that? Basically, what it means is that it keeps the dollar in the soft position.
00:05:06
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So there are two currencies in an exchange rate. So if you're quite cautious on the dollar, that means you have to like something else and you're funding out of the dollar to find something else to like. So that's how I would describe this funding bucket. But it's not a loan. There are other currencies that are moving into that orbit.
00:05:22
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So indeed, in your report, you focus on currency
Challenges Facing the UK Economy
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pairs. Firstly, let's talk about sterling. The UK economy is not doing great with unemployment number published this week, reaching a post-COVID high of 5.2% and raising the prospect of further rate cuts by the Bank of England. Does that impact your outlook for the currency?
00:05:40
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It's a great question, because you think about funding currencies, sterling is starting to tick that box. You have a central bank, which is in an easing cycle. You have a backdrop in terms of growth that is looking lackluster. You have some structural pressures against the currency, too, which are raising question marks. So again, I think that people are starting to think about opportunities or options to fund not just out of the dollar, but even the British pound. And I think that will continue to be the case over the coming months.
Currency Opportunities: Euro and Yen
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What about the euro? You say in your report that it's working progress. Why do you say that? Well, at the end of the day, the European Central Bank is sounding pretty comfortable in its policy setting. I also think that if you believe in a soft dollar, again, the byproduct is actually euro tends to strengthen. It is commonly noted as the anti-dollar.
00:06:31
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So if you're cautious on the dollar, you tend to be upbeat on the euro modestly. However, if the exchange rate starts to go above 120, there is a view in financial markets that that could make the ECB sound more dovish. And that in turn can make the euro become more of a funding currency too, particularly versus the currencies where we're very optimistic.
00:06:52
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Another currency where there's obviously been a lot of domestic action is the yen, where we've had an election which has turned out a sort of pretty overwhelming result. Is that important for the currency?
00:07:04
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It's very important in our framework in the sense that Japan's local factors, political factors and uncertainty had been disrupting or keeping the currency in a weaker position. So when we talk about policy uncertainty in the U.S. weighing on the dollar, we've had a similar situation for the Japanese yen. Now that the election is behind us, the currency has recovered modestly. We're in a holding pattern, admittedly, because we're trying to find out what the LDP's next moves are going to be with regards to fiscal policy, how the Bank of Japan could be responding to that. But our baseline assumption is that the worst has passed for the Japanese yen.
Australian and Latin American Currency Strengths
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Now, there is one central bank, which is hiking rates, the Royal Bank of Australia, with cyclical factors underpinning those moves. Do you think there are also structural arguments behind the Aussie dollar?
00:07:53
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Yes. And when we come down to thinking about currencies we like and we've been very optimistic on, that's one of them. Again, it ticks a lot of the right boxes. You've had a central bank that started to raise interest rates. You have a fiscal outlook which looks very upbeat compared to many other places in the major economies at least. And on top of that, in terms of structural factors, The way that the hedging flows could be working to support the currency or investment in flows behind it that could support the currency, again, it ticks a lot of the right boxes and it's one of our preferred currencies in 2026. What else do you like?
00:08:28
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At the other end of the spectrum in emerging markets, we've been relatively upbeat on Latin American currencies for quite some time. So Joseph and Calcaterra has been very positive on the region for over a year.
00:08:39
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Is that linked to commodities? It's partly linked to commodities. It's partly linked to their level of yields, which are quite attractive for investors. On top of that, it's a very busy political cycle this year in Latin America. And there are expectations that there could be more market friendly outcomes. So again, that region ticks a lot of the right boxes.
00:09:01
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Well, I wish you luck navigating all of this policy uncertainty. I think I can safely predict that there's going to be plenty more of that.
Engagement and Additional Resources
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But thank you for for joining us today, Paul. Thank you very much.
00:09:17
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Before we go, a reminder that you can keep up to date on all of our latest reports and videos by downloading our app from Apple's App Store or Google Play. And you can listen to our Asia-focused sister podcast, Under the Banyan Tree, wherever you get your podcasts.
00:09:33
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And if you've got any questions or comments, then you can get in touch with us at askresearch at hsbc.com. So that's it for today. This week's podcast was hosted by me, Piers Butler, and produced by Tom Barton.
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Remember to like and subscribe to The Macrobrief wherever you get your podcasts. We'll be back next week.
00:10:23
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Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.