In early 2017 sterling traded at levels against the dollar which had not been seen since the mid-1980s and some observers were predicting the two currencies could reach parity.

Amid reports Theresa May was committed to a so-called ‘hard’ Brexit the UK currency tanked against its US counterpart and fell below $1.21. In the intervening seven months the direction of travel has been very different and the exchange rate recently flirted with $1.32, despite ongoing political uncertainty in the UK following an inconclusive election result.

POLITICS AND INTEREST RATES

There are two key reasons for the slide in the dollar. President Donald Trump’s administration has been beset by chaos with numerous high profile departures and there is growing lack of faith in its capacity to deliver meaningful economic and fiscal reforms.

Less high profile but almost certainly as important is the posture adopted by US Federal Reserve chairman Janet Yellen which has limited expectations for many further interest rate increases in the US this year.

As a quick reminder higher rates tends to translate into currency strength. The increased return on offer attracts foreign investment, inflating demand for and the value of the home country’s currency.

ETX Capital senior market analyst Neil Wilson says: ‘there’s a lot of dollar softness out there with political uncertainty and doubts around the Federal Reserve’s capacity to raise rates again this year weigh’.

‘The dollar index plunged to new 13-month lows below 93, a level that takes it close to pre-tightening levels,’ he adds. ‘The dollar has lost 10% this year and is showing no signs of arresting that decline.’

THE BIG SWITCH?

There are a number of implications for investors. If this trend were to continue it could be negative for the FTSE 100 given it derives upwards of 70% of its earnings from overseas  and many are big dollar earners. These dollar earnings are now worth less when translated back into pounds.

Our main feature in the 27 April issue operated on the premise that the Conservatives would increase their majority in the General Election and although this did not transpire it may be worth revisiting that article now given it was focused on just such a reversal of sterling’s poor run against the dollar. If the traditional inverse relationship between the dollar and commodities holds true there could be a boost for resources stocks (we look at the first half results from big oil on page 8).

The reversal in the dollar could be useful for US companies with big export markets. Heavy manufacturers such as Caterpillar fall into this category. Investors looking for exposure to the US industrials space could consider an exchange-traded fund like SPDR S&P US Industrials Select Sector (SXLI) which has an all-in charge of 0.15%. The basket of tracked stocks includes Caterpillar alongside the likes of General Electric and Lockheed Martin.

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