USD: Down
The Dollar is down roughly 6 percent YoY, fully retracing its Trump driven Q4 2024 surge. Against G10 currencies it has been mostly flat over the past six weeks, perhaps markets are now treating the outlook as more balanced. The speed of this pullback is consistent near a currency peak, but perhaps this is an early stage in the broader move rather than the final stretch.
The latest payrolls data points to further cooling in US activity and a softer growth premium, which keeps downward pressure on the Dollar over time. A key question is whether international investors will keep shifting capital away from US markets when returns are acceptable but not standout. US equities are flat, but for investors in Europe, US equities are down about 8 percent in local currency terms, which makes the performance gap with European equities hard to ignore. Combined with a less favourable policy environment for foreign capital, I expect diversification flows to continue.
Korean Election
The Democratic Party’s decisive election result in South Korea should allow for a rapid formation of a new cabinet, given its control over both the executive and legislative branches. This should enable sizeable fiscal support, progress in US-Korea trade negotiations, and further corporate governance reforms. Together, these factors could help reduce the long-standing discount in Korean equities and the Won.
Over the past week, both the Kospi and KRW have been among the strongest performers. Valuations remain attractive, and KRW is one of the currencies most responsive to broad Dollar weakness and CNY appreciation, with local authorities showing little resistance to further gains.
US Fiscal Risk
The current US budget process has brought fiscal sustainability concerns back into focus, not only in the US but also in the UK and Japan. Historically, larger net Treasury issuance has tended to support the Dollar, mainly because foreign demand for Treasuries usually rises aswell.
However, with foreign holdings of US assets already high, a weaker return outlook, and policy conditions that are less welcoming to overseas investment, the historical link between issuance, foreign inflows, and Dollar strength could start to fade. The recent increase in the US fiscal risk premium adds another layer. A sharp steepening in the US 5s30s curve tends to weigh most on higher-yielding currencies. Meanwhile, wider US CDS spreads are typically associated with weaker performance in cyclical currencies such as NOK and AUD. I think this remains an important issue to watch.
-William Lun
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