Hickmore does, however, feel that the strong performance of the dollar relative to sterling over the longer term could be impacted by more traditional factors, such as the relative strength of the US economy compared with the UK economy.
If the US economy does continue to outperform, that would imply a higher interest rate would likely be needed in an economy with below-trend growth.
Jason Da Silva, head of investment strategy at wealth manager Arbuthnot Latham, also believes economic performance has been key to the dollar’s recent strength.
He says: “A significant driver of currency markets over the last few years has been rate differentials between various economies. This can particularly be seen with the US dollar. 'US exceptionalism' has been the dominant theme, with US growth outperforming many peers.
“This higher growth has seen market participants estimate that US rates will be higher than peers, which has been a major driver of dollar strength. With hotter-than-expected inflation year to date in the US, the market narrative has shifted from questioning when the Fed will ease to whether it will at all, boosting the greenback.”
Differing expectations
Da Silva adds that the market’s differing expectations around the future direction of inflation and economic growth are behind the recent divergence in government bond yields in the UK and the US.
He says the messaging from the US Federal Reserve and the BoE around the extent and timing of rate cuts will be what drives the performance of sterling relative to the dollar in the short term, but in the longer term, he feels the relative economic performance of both economies will determine the rates trajectory.
Emma Moriarty, a former BoE economist and currently a portfolio manager at CG Asset Management, says: “What has happened is that while the rates outlook for the US and the UK seemed to be quite similar as inflation fell, the economies had very different problems.
“In the US, inflation fell because of supply-side factors and actually the levels of personal consumption haven’t really come down [meaning the level of demand in the economy hasn’t fallen despite rate rises], while labour market participation has risen. Whereas in the UK, growth hasn’t been strong — the economy is constrained by housing and labour markets.
“It is also worth stating that there has actually been an easing of financial conditions, with equity markets performing well and credit spreads narrowing,” she adds.
