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The Macro Brief – The dollar bounces back
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Paul Mackel, Global Head of FX Research, looks at how the currency markets have reacted to geopolitical tensions.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/WsVqFks
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Transcript
Introduction to HSBC Global Viewpoint Podcast
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Speaker
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.
Dollar as a Safe Haven: A Year Later
00:00:24
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And the other thing, too, it comes down to just the dollar. Its safe haven bid actually returned. Unlike nearly one year ago when everyone was questioning it, there's been a realization that a leopard doesn't change its spots.
00:00:36
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So maybe that's just a reminder of how it can still be a dominant dollar.
Macro Brief Podcast Introduction
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This is the Macro Brief from HSBC Global Investment Research, the podcast that looks at the issues driving financial markets around the world. I'm Piers Butler. What a difference a month makes for the US dollar.
00:01:04
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Back in February, the Green Bank appeared to be trading weaker than its fundamentals suggested. But fast forward to today and geopolitical tensions have led to a rebound. So today we're looking at how the conflict is influencing the dollar, the other drivers that could influence its performance, and what it all means for other currencies around the world.
00:01:23
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To do that, I'm joined in the studio by Paul Mackle, Global Head of FX
US Dollar's Rebound and Geopolitical Tensions
00:01:27
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Research. Paul, great to have you back on the podcast. Happy to be back. So as the intro said, it's been about a month since the Iran conflict began. And in terms of the currency markets, there have been clear similarities to how they behaved at the start of the Russia-Ukraine war, but also key differences. So let's start with that. Can you unpack that a bit?
00:01:45
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Well, the similarities very much, I think, is identifying who's more vulnerable in this sense when you're going through an energy shock other parts of the commodity complex where prices are rising very aggressively. And that points out a number of Asian currencies or European currencies. And they were struggling back in early 2022.
00:02:06
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And they're struggling once again. There are a number of other differences, though. and one of the standout differences is the behavior of the Federal Reserve. The Federal Reserve was very much adopting a tightening stance four years or so ago, and this time around we don't have that.
Currency Markets and Conflict Resolution Speculation
00:02:25
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The Fed sounds more recently like it's in a comfortable position. So that yes, the dollar has had the upper hand, which has made sense recently, but thankfully, The Fed is not raising rates. If that were the case, the disruption in the currency market would probably be far larger.
00:02:42
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So literally, as we speak, the markets are rallying on the back of headlines that the US President Donald Trump is saying that the war could end within two to three weeks. Could be a false dawn, but if it comes to pass, does that mean that we go back where we started, or are there long-term consequences?
Long-term Economic Impacts of Ongoing Conflicts
00:03:00
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I think that's what many investors are trying to decipher. And on the one hand, the temptation to go back to where we were, say towards the end of February, where the backdrop for many emerging market currencies was quite positive, or just generally speaking, the broad dollar was in a soft orbit.
00:03:18
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But on the other hand, there's still a lot of unknown impacts that could be filtering through that could harm the global economy. Risk premiums in general could be higher because of the scarring of this conflict.
British Pound's Performance and Bank of England's Role
00:03:31
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In which case then, this safe haven bid for the dollar may still have somewhat of a lingering effect going forward, at least in a longer term basis. Let's talk about sterling. In the past month, it has outperformed relative to the euro, seemingly helped by a jump in short-dated gilt yields.
00:03:49
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Would you have expected the British pound to be one of the best-performing G10 currencies in response to the energy shock? I think there are two things that are happening. One is it's not as exposed in the energy shock compared to other currencies, which I think by itself is helping to support the British pound.
00:04:05
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I think the other angle which has been lending an advantage to the currency has come down to the messaging from the Bank of England that it's sounding more hawkish.
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And as I said, that's providing some insulation as well to the currency.
Euro vs Dollar: Economic Strengths and Policies
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But still, there are a number of issues going forward where we have to be very mindful that there are downside risks to the British pound.
00:04:29
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What could happen if the energy shock becomes a lot more disruptive? What could that mean for the fiscal outlook for the UK potentially? Yeah, because the room for maneuver in the UK in terms of headroom is is very limited, isn't it?
00:04:41
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There's a strong perception in financial markets that that policy room from the fiscal side is limited. And if their type of concerns became ah more elevated, that could harm the British pound.
00:04:53
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What about the euro? Is the concern that the US dollar's cyclical backdrop was comparatively healthy going into the Middle Eastern crisis? Is that also coming back to the strength of the dollar, that the US economy actually is was strong going into the crisis and actually relatively insulated? I think, yes, it's another reason why the dollar has had an advantage. It's not just because of terms of trade differentiation for currencies, where US dollar is more insulated, associated with energy prices.
00:05:21
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but as you rightly point out, that you believe the impact from the one big beautiful bill that's been lifting US growth, so from the cyclical side of the dollar, yes, it makes sense why it should have somewhat of an upper hand versus other currencies.
00:05:35
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And in terms of European central bank policy, where where are we looking at there? This is an important question because central banks in Europe, some of them at least, are sounding more hawkish.
00:05:47
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And I think but between the hidden lines, reading between the lines that is, that maybe they don't want their currencies to be
Currency Flows in Asia and LATAM: Emerging Market Impacts
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weakening too much. If you're going through this trade distortion, supply disruption, energy price shock, that could be weakening European currencies. They don't want that necessarily to occur too quickly because it could be adding to inflationary pressures.
00:06:09
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So there's been a sudden about turn in some of the language, as I pointed out with the Bank of England and even parts, of the membership of the ECB. Let's turn to emerging markets. In terms of flows, we've seen a significant reversal out of Asia as international investors have reduced their exposure and we have seen the unwinding of popular FX trades, whereas LATAM has been relatively unscathed. Is that likely to continue?
00:06:34
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The short answer is yes. That's been our regional preference for quite some time. Latin American currencies have quite sound policy buffers in terms of where real yields sit Markets are thinking about the election dynamics.
00:06:49
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And it's not as linked directly to the Middle East through growth or even through the lens of geopolitical risk. So it's not quite a port in the storm.
China's Economic Resilience and Currency Stability
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But fundamentally, it makes sense why these currencies should hold up better than, say, Central Europe or Asian currencies. The latest economic data out of China showed resilience, particularly within the industrial sector. And of course, we have President Trump's visit to Beijing in mid-May.
00:07:18
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Is that a positive for the renminbi? For the data, I'd say on the margin, it could be positive for the currency. But when you have this uncertain climate, it's no surprise to us that there's an emphasis for stability in the exchange rate, and that is primarily versus the dollar.
00:07:34
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And as long as this uncertainty continues, then that emphasis on stability will endure.
Gold's Role in Crisis and Central Bank Demand
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So it's about having the upper hand versus other currencies as well, because as the dollar has strengthened, while the renminbi has also strengthened versus other currencies on a basket base, it makes total sense.
00:07:52
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On your team, your colleague Jim Steele covers precious metals, including gold, and the latter has sold off during the crisis, which seems counterintuitive, at least to me, given its traditional role as a safe haven and an inflation hedge. What's going on there?
00:08:04
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It does highlight that when you go through heightened periods of uncertainty, that gold doesn't always perform very well. There's a track record of this, at least in the initial stages. So we had quite a big amount of correction.
00:08:17
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and probably outflow from the retail community that's been taking the shine off gold. But I think the longer term story is very much there. And the official demand for gold will probably also turn still quite supportive for it.
Investors' Views on Conflict and Global Risk Premiums
00:08:29
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It's fair to say that central banks have been big buyers of gold. Is that likely to continue? It has been over the last few years. More recently, there's been indications that some central banks could be thinking differently, willing to deploy some of their gold holdings.
00:08:43
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But I think that the longer term trend is still very much going to be in place. Now, you've made time from a busy marketing schedule in London to come and talk to us. You've been seeing clients. What's on their minds? What's the mood out there?
00:08:55
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There's a lot of hope. There's a lot of hopium that things will get better and this conflict will end soon. But no one seems to have a clear answer about when that could occur.
00:09:06
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And also, what does it mean for, as I said, the broad risk premium around the story going forward? Will it remain elevated? Could it change the dynamics with regards to energy supply, commodity supply into different markets? What does this mean for many currencies going forward?
Podcast Closing and Participation Appreciation
00:09:23
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And the other thing too, it comes down to just the dollar. Its safe haven bid actually returned. Unlike nearly one year ago when everyone was questioning it, there's been a realization that a leopard doesn't change its spots.
00:09:36
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And the dollar's safe haven bid had returned. So maybe that's just a reminder of how it can still be a dominant dollar. I think that's all we have time for today. Thank you for making the time, as I said, and we'll see you back on the podcast soon,
Accessing HSBC Content and Contact Information
00:09:51
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I hope. Thank you very much.
00:09:59
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00:10:10
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00:10:27
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So that's all from us today. This week's Macrobrief was hosted by me, Pierce Butler, and produced by Tom Barton. If you're enjoying the podcast, then please like, subscribe, and share with your friends and colleagues.
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Until next week, thanks very much for listening.
00:11:05
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