Market Brief: Dollar Rallies Back, Euro Tumbles

The ‘US exceptionalism’ theme is back to driving markets this morning, helping the dollar snap a three-day losing streak against most of its rivals. The euro is coming under pressure as the French government struggles to pass a budget, the Swiss franc is advancing amid stronger safe-haven flows, and major high-beta currencies - like the Canadian dollar - are all off around half a percentage point.

The dollar’s outperformance this year can be seen clearly in the chart below, which shows trade-weighted values through November 27. After softening in the run-up to the Federal Reserve’s first rate cut, the currency has switched direction, surging against all of its major counterparts over the last two months. We don’t expect this to continue for long - at some point, investors will take a more nuanced view on the US economy’s future. But for now, stepping in front of the freight train might be hazardous to any hedger’s health.

To summarise holiday-curtailed trading action over the last week:

Treasury yields fell back to pre-election levels, equity markets soared to new highs, and the dollar softened after Donald Trump named Scott Bessent as his pick for Treasury Secretary. Bessent, with a long trading background and strong grasp of global macroeconomics, is seen by Wall Street as someone who could help steer fiscal policy in a more sustainable direction and act as a moderating influence within the incoming administration.

The Mexican peso and Canadian dollar weakened briefly after Trump returned to tweet-based policymaking, walking back a threat to impose 60-percent tariffs on imports of Chinese goods while also threatening to hit products from Mexico and Canada with 25-percent duties. Traders initially reacted with alarm, but ultimately decided that the president-elect was unlikely to follow through on his threats, and bid both currencies back up to pre-tariff levels.

But the Canadian economy turned in another poor performance in the third quarter, helping make an outsized December rate cut marginally more likely. Gross domestic product grew at a 1 percent annualised rate in the three months ended September, down from 2.2 percent in the previous quarter, and well below the Bank of Canada’s 1.5-percent forecast. A preliminary estimate showed the handoff to the fourth quarter remaining soft, and bond yields ratcheted lower, widening rate differentials relative to the US.

And emerging market currencies tumbled after Trump took to social media again, threatening to raise taxes on Americans if members of the BRICS* country grouping failed to commit to avoid creating an alternative to the dollar among themselves. “The idea that the Brics Countries are trying to move away from the Dollar while we stand by and watch is OVER,” he wrote in a post on Truth Social, saying he would impose 100-percent tariffs on any country that tried to create or back any currency other than the greenback.

We’re at a loss as to why the president-elect decided that this was a good idea**. The dollar remains absolutely dominant in global payments systems, currency markets, currency reserve balances, and cross-border lending activities, dwarfing the combined share held by the BRICS currencies. No serious efforts to create a rival exist, and China - which would form a necessary linchpin in any plausible alternative to the dollar-based order - is simply uninterested in opening up its own capital account.

Further, if Trump wanted to reduce US trade deficits, he would be working to lower the greenback’s value, not trying to raise it by forcing foreigners to accumulate dollar-denominated claims. This is because raising the value of the dollar implicitly increases relative US production costs while incentivising consumer spending on foreign products. For many decades, there has been a strong relationship between changes in the value of the dollar and changes in the country’s current account balance. The president-elect's tariff and currency management messages over the last week achieve goals that are diametrically opposed to his other policy objectives.

In the week ahead:

This morning’s data should show the US industrial sector staging a small recovery in early November. The Institute for Supply Management’s manufacturing purchasing manager index is seen rising from October’s 46.5 print as factory orders rebound from a two-month hurricane- and strike-related slowdown, but will likely remain below the 50 threshold that separates expansion from contraction.

The French government could collapse. Over the weekend, the far-right National Rally (RN) party escalated threats to bring down Prime Minister Barnier’s minority government, pushing French borrowing costs above those of Greece for the first time on record, and driving the euro lower against the dollar. “The RN will trigger the no-confidence vote mechanism unless there is a last minute miracle,” said party president Jordan Bardella, warning Barnier to meet financial demands by the close of business today. If a deal isn’t reached, the 2024 budget would likely be “rolled over” into 2025, leaving the government’s deficit running close to 6.1 percent of gross domestic product, instead of the 4.4 percent that had been proposed.

But it’s not déjà vu all over again. European rates are substantially below levels reached earlier this year and have been falling since early November - French yields have simply fallen by less than their counterparts. Investors are bracing for more turmoil ahead, but do not see France’s troubles representing an existential threat to the euro area’s stability.

Thursday’s OPEC+ meeting will see the cartel debating whether to increase output next year. Oil prices have been drifting lower amid a calming in geopolitical tensions, and could fall further in the year ahead as markets move into oversupply. Structural demand in most advanced economies is easing, China is rebalancing away from commodity-heavy growth, and global output levels are growing at a rapid clip: Iraq, Kazakhstan, Russia, and the United Arab Emirates are all pumping more than their allotted quotas, and the US is still increasing production, cutting into the group’s market share.

Friday’s non-farm payrolls report will play a critical role in setting expectations ahead of the December Fed meeting. The median consensus estimate suggests that the US economy added 200,000 positions in November, but that conceals considerable uncertainty around the scale of the post-hurricane, post-Boeing strike rebound in labour markets.

And Canada’s jobs report - the last major release before the central bank’s December meeting - will help calibrate odds on a second consecutive jumbo-sized rate cut. We have no idea what the headline job creation number will look like - the series has become incredibly difficult to forecast - but the unemployment rate may tick down slightly as the government’s recent immigration limits begin to hit inflows and existing entrants are absorbed into the labour force. Markets are currently assigning coin-toss probabilities to a 50 basis-point move from the Bank of Canada on December 11, and we think that is broadly correct. The economy remains terribly weak and there are major uncertainties on the horizon that argue for an outsized “insurance cut”, but there are also green shoots emerging in housing markets and consumer spending that could point to a modest recovery in the new year.

*Originally Brazil, Russia, India, and China, but now South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates.

**Some have pointed to social media posts like this one showing Russian president Vladimir Putin holding a mock-up of a BRICS note, but we’re not sure. We’re also unsure as to whether he might realise that the mock-up was presented by a group of people unrelated to the BRICS organisation - the included photo did not mark the “unveiling” of an alternative to the dollar.

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