The US dollar [USD] will suffer as global growth rebounds from the Covid-19 crisis, potentially triggering the end of its bull market run, however any weakness will be muted in comparison to the multi-year downtrend that followed the global financial crisis. This is the view in new research, “COVID-19: The Trigger That Ends the US Bull Market?” published by Insight Investment, a global investment manager with $909bn under management1&2
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Francesca Fornasari, author of the research and Head of Currency Solutions at Insight Investment said, “During the global financial crisis, the US dollar surged as investors fled to the deepest and most liquid market. But, as equities bottomed in March 2009, the USD peaked and embarked on a multi-year downtrend. As the global economy faces another severe downturn, caused by Covid-19, so the USD has moved to historic highs. However, this time around the underlying structural support of many currencies is much weaker than 10 years ago. We expect a more muted rebound and greater differentiation amongst currencies with a high beta to the economic cycle.”
Insight has identified four differences between the backdrop for currency markets in 2009 and 2020:
- The current fiscal easing is larger than in 2009, but very different in nature. In 2009 public investment made up 31% of fiscal spending vs 7% now.
- The broad level of leverage is higher. Emerging market debt has witnessed a 60% increase in leverage, a sharp contrast to early 2000 when emerging market leverage was declining.
- China and globalization will play a more muted role in supporting the rebound. We don’t have the same tailwinds in global trade caused by China’s inclusion in the World Trade Organization in 2001.
- Trend growth is lower, particularly in emerging markets. The decline has been most aggressive in emerging markets where total factor productivity is estimated to have fallen by 65%.
