US Dollar slide gains momentum

• The US Dollar index is down 9% from early November and 1.5% to start the year.
• The steady decline in the US Dollar from the highs of September 2022 is generating an updraft to international securities.
• A return to a depreciating US Dollar eases the pressure on foreign US-denominated debt, tempers exported US inflation and raises international capital flows and foreign direct investment (FDI).

US Dollar

International financial markets are returning investors to shelved playbooks as the US Dollar continues its slide.

Source: marketwatch.com

Despite the lighter trading volumes for the US holiday and the upcoming Chinese New Year, the overarching risk-on theme is returning, despite warnings from the World Bank, IMF & others of the elevated risk of a global recession.

Beneficiaries of a lower US dollar

The signalled slowdown in the US treasury market interest rate hikes has taken the sting out of the US Dollar. It is a welcome development for international markets weighed down by the double-edged sword of higher service prices and US dollar-denominated commodities.

The weakening US Dollar and the subsequent dampening of the exported US inflation are returning capital and foreign direct investment to parched markets.

Investors increased their holdings of Chinese debt for the first time in almost 12 months.

A return to risk-on to China and international markets is a boon to Australian stocks. The easing of the interest rate hikes and more transparency down the curve is lifting a raft of securities.

Technology stocks are finding a footing after some existential cost-cutting measures and venture capital removal over the last twelve months. S&P/ASX 200 Information Technology ASX: ^AXIJ (XIJ) up 1.6% to start the week and 8% on the week.

S&P/ASX 200 Materials ASX: ^AXMJ (XMJ) is up 25% from the start of October 2022. XMJ continues its remarkable run from the commencement of the US Dollar slide. The retreat in wages and overheads priced in US dollars combined with the unfettered rise of the market prices of raw material prices under a weaker dollar continues to improve margins.

The path ahead

The US Federal Reserve’s current path is attempting to return to the pre-pandemic mean of capital flows and FDI. Exiting the era of hyperinflation while redirecting capital to not only its own markets but those of mutual interest before the pandemic and hyperinflation upended the status quo.

Presently, we can see the buds of those labours with the recent direction in inflation and the outward momentum of capital flows, showing in the appreciation of Chinese and Australian stocks.

Whether the labours flower and yield abundant fruit is yet to be seen; several obstacles exist. Critically, can corporate and government budgets sustain the present levels of employment while avoiding overheating prices?

Summary

International government budgets outside Australia are directed toward austerity; corporate profit margins are tightening as the era of low-interest rates and swollen money supply ends.

The Federal Reserve is providing a boost to international revenues of US corporates by lowering the US dollar. The smaller debt piles for international governments issuing US dollar-denominated securities will protect some corners of budgeting.

The world economy is as sensitive to US policy as it has been in recent living memory. The success of this tightrope walk that the US federal reserve and the US dollar are attempting is critical to the global economic outcomes of 2023.