Dominant dollar drives all before it as China’s growth falters

US dollar strength is having a wide and varied impact on the global economy

The dollar is driving all before it

For those watching the long-term trends, this week’s action on the market was a fascinating indication that there is still all to play for in the struggle for global dominance in the 21st century.

Wednesday was the crucial day, as dollar strength combined with fears of slower growth in the Chinese economy to trample on commodity prices and equity markets alike. The FTSE 100 hit a four month low, the gold price sank further beneath the US$1,200 mark, and the copper price dropped 4% at one point, compounding a long recent run of falls.

Indeed, by some measures, copper is now in bear market territory since it’s now trading at 20% below its 52 week highs.

But copper wasn’t the only metal to be hit by the perceived likelihood of weakening demand from China and the strengthening of the dollar. Platinum and palladium also weakened, while the LME reported that most contracts were down by at least 2%.

The ripple effects were only too predictable. A sell-off in the mining sector was one of the principal causes of the FTSE’s weakness, with Anglo American (LON:AAL)the worst hit and plumbing new 2018 lows, but Glencore (LON:GLEN), Rio Tinto (LON:RIO), BHP Billiton (LON:BLT) all also weaker.

What’s more, dollar strength is beginning to bite around the world too. While it may be true, as analysis from German bank Berenberg has it, that Turkey’s current economic woes are “completely home made”, it’s also not helpful that its debt is denominated in dollars and becoming more expensive to service by the hour as the dollar strengthens and the lira weakens.

Analysts are perplexed by Mr Erdogan’s unwillingness to raise rates to defend Turkey’s currency, but even if he did, the price of the country’s debt would still be dearer.

Could the weakness of Turkey in the face of dollar strength spread elsewhere, to places like Argentina? Possibly, and that kind of worry is only serving to drive more investors towards the US dollar, as emerging markets around the world fall out of favour.

A case in point is the South African rand which dropped 3% on Wednesday, as the dollar drove all before it and investors took stock of the country’s exposure to mining and metals. It was a double whammy that goes to the heart of the fragile nature of the post-Apartheid economy and must give new President Cyril Ramaphosa, himself a former mining man, sleepless nights.

Still, the likelihood of the disarray in the emerging markets spreading to the heart of the global economic engine in the US remains remote. Wells Fargo says that the current US expansion is “unlikely to be derailed” by the current turmoil elsewhere, and of course if China is slowing down then President Trump will have cause for satisfaction.

It’s not clear yet that his tariff policies are working, but slower Chinese growth will at least take some of the heat off the US, especially when the US’s own growth is accelerating.

Of course, Wednesday’s market chaos was followed by a certain amount of correction. The Remnimbi rebounded from its Wednesday lows, most miners stabilised, and some, like Hochschild (LON:HOC) and Kaz Minerals (LON:KAZ) even bounced on positive results.

What’s more interesting is that the gold price has remained stubbornly tied to the US dollar and has belied its standard role as a safe haven asset in times of trouble. One might expect increased buying of gold from Turkey, but if it’s happening it’s not on a broad enough scale to influence the market.

Instead, the Fed’s continuing plans to boost rates while simultaneously reducing its own balance  following the end of quantitative easing are setting the price. Gold may still be the best long-term store of value the world has ever known, but for the time being the pretender to the throne, the dollar, is masquerading very successfully as king.

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