The US dollar (USD) has risen more than 2.3% this year1, driven by solid economic growth in America and general risk aversion. Worries over rising global trade tensions and some localised events in emerging markets (EM) have led investors to turn towards less risky investments such as the USD.
- The USD is likely to stay strong in the near term.
- However, we believe that it will weaken in the longer term because
- The USD is overvalued at around 1.5 standard deviations above its 10-year average in real effective exchange rate terms2.
- An increasing current account and fiscal deficit in the US due to greater government spending will weigh on the greenback in the longer run.
- A weaker USD may provide a more constructive backdrop for EM assets, but differentiation by country remains critical.
- Argentina, Indonesia, South Africa and Turkey have seen their currencies tumble as they face country-specific issues. But for the other EM countries, the strong USD is not a reflection of deteriorating fundamentals.
1Bloomberg Finance L.P. Data from 01/01/2018 to 26/09/2018. Past performance is not a reliable indicator of current and future results.
2FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management, as of 06/09/2018.