What does the chart show? 

The chart shows the performance of various currencies versus the US dollar as well as the performance of the US dollar trade-weighted index (a measure of the value of the USD against a basket of other major currencies) year-to-date. All major currencies have fallen significantly this year and the USD trade-weighted index has risen as markets position for an increasing divergence in monetary policy paths between the US and other major economies. The Japanese yen has struggled so far this year as the Bank of Japan (BoJ) continue to run with ultra-loose monetary policy. The euro and sterling have also suffered as investors have started to question how far the European Central Bank (ECB) and Bank of England (BoE) will be able to raise rates this year without having severe economic ramifications. Additionally, the recent depreciation of China’s currency against the dollar comes as the country grapples with a resurgence in Coronavirus, dampening the outlook for global growth, further bolstering the dollar which is traditionally seen as a safe-haven currency when investors flee from risky assets (despite Q1 GDP in the US unexpectedly falling nearly 1.5%). 

Why is this important? 

As investors flee to the US dollar, this would hurt US multinationals who need to convert their weaker foreign currency revenues back into a stronger dollar. A stronger dollar would not be beneficial to US exporters, particularly at a time when slower global growth potentially means lower demand for their products and services. However, a stronger currency may be advantageous to the Fed who might welcome the downward pressure a stronger dollar exerts on the current multi-decade high inflation rates, which in turn may give policymakers more flexibility as they may not need to raise interest rates as high as they otherwise might have. For other economies around the world, a stronger dollar makes dollar-priced goods and services more costly to buy in their local currencies. With recessionary risks to the eurozone, the UK facing a potential economic slowdown and the BoJ committed to retaining ultra-loose monetary policy, the US dollar may not be ready to cool off just yet.