Han Tan Market Analyst at FXTM
Han Tan Market Analyst at FXTM

Q4 Outlook: Dollar’s safe haven status should preserve 2019 gains

The Dollar Index (DXY) is set to end the third quarter having gained more than two percent, and that’s even with two Fed rate cuts occurring during the period. Considering the downside risks that still plague the global economy, the Dollar is expected to hold on to its advances and end 2019 with gains for the year. The Dollar’s safe haven status has really kicked in amid US-China trade tensions and waning global growth, while pockets of geopolitical risks compound investors’ uncertainties.

With capital preservation being the de facto mode among global investors at this point in time, US Treasuries are a safe bet in the face of global turmoil. The demand for US government assets is fueling the Dollar’s resilience, maintaining the Greenback’s status as the world’s reserve currency.

Most G10 currencies have scarce ammo to fend off Dollar strength

Currencies across most of the developed world have little to offer in offsetting the Dollar’s strength. Looking at the major components of the DXY, the Euro remains rooted to the 1.10 mark against the US Dollar as the bloc tries to fend off a recession. As the world counts down to the October 31 Brexit deadline, markets are unable to completely rule out a no-deal Brexit, which is preventing Sterling from being restored above the 1.30 mark against the Dollar for now. Over in Japan, the planned sales tax hike in October, along with the Bank of Japan potentially pushing interest rates further into negative territory, all point to a muted performance by the Japanese Yen, despite its status as a safe haven asset.

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Emerging-market currencies have endured Dollar-driven rollercoaster ride so far in 2019

The Dollar has also wreaked havoc on EM currencies, with the latter being taken on a wild ride so far this year. Looking at the MSCI Emerging Markets Currency Index, gains in the first seven months of 2019 were wiped out in August, only to pare losses in September. Given the pronounced slowdown in the global economy, the risk-off sentiment has left EM currencies struggling, barring the likes of the Russian Ruble and the Thai Baht which still boast remarkable year-to-date gains against the US Dollar.

Threats to King Dollar’s throne

There however are risks to the stronger-Dollar narrative as we head into the final quarter of the year.

The US and China are set for high-level trade talks in October, and signs of thawing tensions between the world’s two largest economies could boost risk appetite and eat away at the Dollar’s resilience. Should existing tariffs be dismantled in the coming months, that would greatly alleviate the downward pressures on the worldwide economy, which could force the Dollar to give up some of its 2019 gains.

US President Donald Trump has long lamented the Dollar’s strength, which heightens the risk of his administration’s direct intervention into the Dollar. Even if that were to happen, it would have a limited effect on the Dollar’s performance, unless Trump can get other major economies to play along and make an orchestrated effort in weakening the Greenback.