stock market panic! What's wrong with the dollar?

The stock markets are falling sharply and the tension in the financial world is suddenly rising sharply. Fortunately, there are safe havens, such as gold and government bonds. But what's wrong with the dollar?

Prices have fallen sharply in recent days and the so-called fear index VIX has risen 40% to the highest level since the panic of April. The month of October threatens to be another bad month for the financial world. That in itself is nothing new. In 1987, the Dow Jones fell by more than 19% in one day on Black Monday (October 20).

What's new is that some safe havens no longer offer the protection investors expect. Although the gold price rebounded by more than 3% last week and German and American government bonds also increased in value, the dollar on the other hand, it lost ground against other currencies.

The Fed is crazy
The weakness is partly the result of a statement by US President Donald Trump. At a meeting, he said the central bank faces a significant risk from raising interest rates at the current rate. That statement is mainly motivated by his promise to keep economic growth above 3%.

The central bank has nothing to worry about. The president does not have the power to fire Fed Chair Jerome Powell. In addition, the bank should focus on creating full employment and curbing inflation. From this perspective, it is only logical that interest rates have been jacked up a bit lately.

4 or just 3?
In fact, the Fed seemed well on its way to implement its fourth rate hike of 2018 in December. However, that move seems to be jeopardized by Trump's criticism, the turmoil in financial markets and indications that inflation is going to run a little less quickly than it had originally anticipated.

Growing uncertainty about another rate hike is a key reason why the dollar is under some pressure, despite many investors now seeking safe havens. The dollar's loss is partly the euro's gain. However, that does not immediately make the currency a safe haven in the current climate.

Loss of the dollar
The uncertainty about the Italian budget and the progress of Brexit is simply too great for that. More clarity about these matters will be forthcoming shortly. On 18 October, the British plans to leave the Union will be discussed at the European summit and Brussels will pass judgment on the Italian budget by 21 October.

It has been 6 years since the European Commission rejected the budget plans of a Member State. In the current market turbulence, if you want to look for the safety of the sidelines, it is better to opt for the Swiss franc or rather the Japanese yen instead of the US dollar. The latter currency has already appreciated more than 2% against the dollar in recent days.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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