Skip to main content
logo
  • Products

    Investment Vehicles

    • ETFs
    • Commingled Funds
  • Investment Strategies

    Investment Options

    • Alternatives
    • Beta Strategies
    • Equities
    • Fixed Income
    • Global Liquidity
    • Multi-Asset Solutions
    • Commingled Funds

    Capabilities & Solutions

    • ETFs
    • Global Insurance Solutions
    • Liability-Driven Investing
    • Pension Strategy & Analytics
    • Outsourced CIO
    • Retirement Plan Solutions
    • Sustainable Investing
  • Insights

    Market Insights

    • Market Insights Overview
    • Eye on the Market
    • Guide to the Markets
    • Guide to Alternatives
    • Market Updates

    Portfolio Insights

    • Portfolio Insights Overview
    • Alternatives
    • Asset Class Views
    • Currency
    • Equity
    • Fixed Income
    • Long-Term Capital Market Assumptions
    • Portfolio Strategy
    • Sustainable Investing Insights
    • Strategic Investment Advisory Group

    Retirement Insights

    • Retirement Insights Overview
    • Guide to Retirement
    • Defined Contribution
  • Resources
    • Center for Investment Excellence Podcasts
    • Events & Webcasts
    • Insights App
    • Library
    • Taft-Hartley
    • Market Response Center
    • NEW: Morgan Institutional
  • About Us
    • Trusted Asset Manager
    • Diversity, Equity & Inclusion
  • Contact us
  • English
  • Role
  • Country
  • Morgan Institutional
    Search
    Search
    Menu
    You are about to leave the site Close
    J.P. Morgan Asset Management’s website and/or mobile terms, privacy and security policies don't apply to the site or app you're about to visit. Please review its terms, privacy and security policies to see how they apply to you. J.P. Morgan Asset Management isn’t responsible for (and doesn't provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the J.P. Morgan Asset Management name.
    CONTINUE Go Back
    1. The highly valued dollar

    • LinkedIn Twitter Facebook Line

    The highly valued dollar

    08/01/2022

    Neil Weller, Head of Global FX Strategy

    The US dollar has appreciated strongly this year reaching parity vs the euro. We evaluate why this has happened and what could cause this trend to change.

    The US dollar is clearly highly valued. In inflation adjusted terms, the trade-weighted dollar is trading within the top 8% of levels seen since the introduction of floating exchange rates in the 1970s.

    Our valuation framework also flags the US dollar as overvalued. Such an extreme valuation signal has historically been followed by a major turning point and strong returns for valuation strategies in the subsequent five years.

    From a qualitative perspective, the signal from the valuation models appears robust. When a currency is overvalued, we would expect to see a decline in the balance of payments position, led by the goods sector. Over the last two years, this has been the case in the US, with export volumes stagnating and import volumes rising.

    Source: Bloomberg, J.P. Morgan Asset Management. Data as of July 2022.

    However, it is worth taking a step back and examining why the dollar has been so well supported, what conditions are likely to be required before a turning point, and whether this time could be different.

    While the Federal Reserve (Fed) has been tightening policy; the Committee raised the Federal funds rate by 0.75% to a range of 2.25%-2.50% at the July meeting, we do not find US interest rates to be a good explanation of dollar strength. In aggregate, interest rate spreads have not moved significantly in favor of the US dollar due to the global nature of the current tightening cycle. Short term market movements have not aligned well with changes in rate spreads. The carry available on the US dollar against low yielding funding currencies does not appear particularly high in risk adjusted terms due to the large increase in currency volatility. Carry-to-risk measures are currently around 0.30, a threshold that has historically been an important indicator of when carry has started to become a theme in currency market movements, but well below the 0.40 to 0.70 levels seen during periods of more intense focus on carry strategies in 2006-2008 and 2018-2020.

    A further complicating factor for carry strategies is the impact of the exit from negative rates and unconventional polices. We believe these polices have been significant for currency markets, with a strong relationship between shadow rate measures that account for unconventional policy and the EURUSD exchange rate over the last five years. Negative rates appear to have had a disproportionate impact on flows out of European fixed income, with over EUR 3 trillion of net outflows seen during the period. Looking forward, we expect the return to positive rates to see some repatriation of these outflows, offsetting the carry advantage of the dollar.

    Source: Bloomberg, J.P. Morgan Asset Management. Data as of July 2022.

    We think the more influential factor behind the US dollar’s strength has been its rising safe-haven premium against an environment of high inflation, a major geopolitical shock to energy markets and increasing chances of economic recession.

    Firstly, when inflation is high, the historical experience is that duration is a less effective portfolio hedge than in low inflation periods. This differs from the performance of the US dollar, which has historically been negatively correlated to equity markets in both high and low inflation regimes. We believe that the high inflation environment has pushed multi-asset investors into greater US dollar allocations and raised the safe-haven premium on the dollar.

    Source: Bloomberg, J.P. Morgan Asset Management from 1st January 1980. Rates measured using US 10-year Treasury

    Secondly, the Russian invasion of Ukraine and subsequent disruptions to trade have had a major impact on the prices of a range of commodities, such as energy. With both Europe and Asia reliant on imports of energy commodities, while North America is broadly self-sufficient, there has been a major shift in terms of trade in favor of the US dollar. In recent months, we have seen the impact begin to show in the trade balances of Europe and Japan, with our forecasts projecting further declines due to the lagged passthrough of price increases. These changes in trade flows directly affect supply and demand for currencies, with the US dollar benefitting as the primary currency for commodity trades.

    Source: Bloomberg, J.P. Morgan Asset Management. Data as of July 2022. MmBTU = Metric Million British Thermal Unit.

    Finally, the global growth outlook has worsened amid the tightening of financial conditions and energy price rises. With recession fears weighing on sentiment towards a wide range of risk assets, we see the safe haven premium in the US dollar as exceptionally high relative to history.

    On a multi-year horizon, we do see scope for the elevated safety premium in the US dollar to decrease. We believe that current infrastructure investment projects will narrow the gap between energy costs in the US and Europe by the time they are completed in late 2024, even without any resumption in Russian energy exports. We also expect bonds to regain their negative correlation to equities, enabling the US dollar to share the role of global safe haven asset.

    For currency investors with the ability to take a multi-year view, extreme valuations are again likely to provide an opportunity. For those seeking a more tactical approach, the economic headwinds that have supported the US dollar remain a challenge. We currently favor relative value strategies motivated by differing exposures to the energy price shock and seeking to minimize overall beta to risk assets, while keeping a close watch for signs that we have reached the peak in safe haven demand for dollars.

    • Fixed Income
    J.P. Morgan Asset Management

    • About us
    • Investment stewardship
    • Privacy policy
    • Cookie policy
    • Binding corporate rules
    • Sitemap
    • Accessibility
    Opens LinkedIn site in new window
    J.P. Morgan

    • J.P. Morgan
    • JPMorgan Chase
    • Chase

    This website is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication you agree with the intended purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. None of J.P. Morgan Asset Management, its affiliates or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all. Communications such as this are not impartial and are provided in connection with the advertising and marketing of products and services. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax and other professionals that take into account all of the particular facts and circumstances of an investor's own situation.

    Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.

    INFORMATION REGARDING INVESTMENT ADVISORY SERVICES:   J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. Investment Advisory Services  provided by J.P. Morgan Investment Management Inc.

    INFORMATION REGARDING MUTUAL FUNDS/ETF: Investors should carefully consider the investment objectives and risks as well as charges and expenses of a mutual fund or ETF before investing. The summary and full prospectuses contain this and other information about the mutual fund or ETF and should be read carefully before investing. To obtain a prospectus for Mutual Funds: Contact JPMorgan Distribution Services, Inc. at 1-800-480-4111 or download it from this site. Exchange Traded Funds: Call 1-844-4JPM-ETF or download it from this site.

    J.P. Morgan Funds and J.P. Morgan ETFs are distributed by JPMorgan Distribution Services, Inc., which is an affiliate of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the funds. JPMorgan Distribution Services, Inc. is a member of FINRA  FINRA's BrokerCheck

    INFORMATION REGARDING COMMINGLED FUNDS: For additional information regarding the Commingled Pension Trust Funds of JPMorgan Chase Bank, N.A., please contact your J.P. Morgan Asset Management representative.

    The Commingled Pension Trust Funds of JPMorgan Chase Bank N.A. are collective trust funds established and maintained by JPMorgan Chase Bank, N.A. under a declaration of trust. The funds are not required to file a prospectus or registration statement with the SEC, and accordingly, neither is available. The funds are available only to certain qualified retirement plans and governmental plans and is not offered to the general public. Units of the funds are not bank deposits and are not insured or guaranteed by any bank, government entity, the FDIC or any other type of deposit insurance. You should carefully consider the investment objectives, risk, charges, and expenses of the fund before investing.

    INFORMATION FOR ALL SITE USERS: J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.

    NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

    Telephone calls and electronic communications may be monitored and/or recorded.

    Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://www.jpmorgan.com/privacy.

    If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance.

    READ IMPORTANT LEGAL INFORMATION. CLICK HERE >

    The value of investments may go down as well as up and investors may not get back the full amount invested.

    Copyright 2023 JPMorgan Chase & Co. All rights reserved.