• The US dollar has outperformed the majority of its most liquid peers so far in 2020. The dollar index – a broad measure of overall USD performance – has been rising steadily since the beginning of the year. The dollar’s gains peaked during a period of strong market instability as governments around the world were busy addressing the spread of Covid-19 by shutting down their economies. The market sell-off led to a significant rush for safety as demand for liquidity spiked.

• Looking at the dollar's individual performance, it has risen against all its major peers, including the ringgit. The predominant subject of risk-on/risk-off has caused the ringgit-dollar exchange rate to fall by 5.8% to reach 4.33 as at 12 May. Other major currencies that fell against the dollar during the same period are the euro (3.2%), pound (7.5%), yuan (1.7%), Aussie dollar (7.8%) and SGD (5.4%).

• Looking at the prospects the dollar, it is expected to outperform its rivals, including the ringgit in the near term which is over coming weeks to around three months given that it is the most liquid safe-haven currency. Much depends on another bout of risk aversion related to the Covid-19 crisis. News of fresh outbreaks in China's Wuhan, South Korea, Germany, Singapore and Mexico are key events on our radar. Malaysia remains cautious on the risk of another bout.

• Furthermore, although the dollar has pared some of its gains by 3.6% to 99.93 as at 12 May from the peak at 102.82 on 20 March, the currency remains elevated. It is because there is a huge gap between expectations, economic realty and optimism of the investors on the speed and strength of the economic recovery in 2H2020.

• At the same time, the focus will be on the relationship between the US and China, especially with US President Trump looking keen to raise the heat on China as the November election approaches. Flare-ups in geopolitical anxieties remain, and traditionally it has favoured the greenback.

• However, on the longer term, the potential of the dollar strengthening will be limited, with more weakening pressure. This is, in part, due to the risk of a more severe and protracted global recession that has diminished. Global lockdowns and movement control order measures are slowly being relaxed.

• Adding on, the once macro and earnings disappointments which are expected to continue in the next few months will start easing. When that happens, the focus will be on forward looking figures which would suggest a stronger and more durable recovery in 2021. Thus, there are strong possibilities for investors to shy away from safe-haven currencies like the dollar and yen, and to be open for alternatives.

• Another driver for a weaker dollar over the longer horizon will be from the impact of the US Fed’s aggressive move to combat the virus crisis by injecting a huge amount of dollars into both the domestic and global economy. While the unlimited QE introduced by the Fed will provide some confidence in financial markets and support the dollar, such support will fade as safe-haven demand softens. The dollar will decline simply because the QE is too large for the dollar to ignore.

• Meanwhile in the near term, the ringgit will be influenced by the ongoing external headwinds, oil price volatility, strengthening dollar as well as domestic challenges such as politics, incoming macro data, corporate earnings and the ringgit-dollar liquidity. On that note, with the view of a stronger dollar in the near term, the ringgit is likely to weaken.

Source: AmInvest Research - 15 May 2020