The six-month decline of the US dollar is the biggest in six years. We try to interpret any currency moves with caution, as history has shown they are one of the most speculative asset classes. 
However, it’s important to consider whether this trend will persist and if so, who the winners and losers might be.
For quite some time markets were characterised by US dollar strength, reflecting relative US economic strength in a period of low global growth.
Ongoing quantitative easing in regions like the eurozone and Japan and political instability in others, not to mention managed depreciation of certain currencies to stimulate economies, amplified this trend.
More recently, some of these dynamics have changed. Eurozone economic growth data has been consistently strong in recent months, whereas US data has been softening
Performance of US dollar & euro vs sterling YTD
Source: FE Analytics
There is also the uncertain political environment in the US, where there’s concern that Donald Trump hasn’t yet passed any pro-growth legislation and disharmony in the Republican party only seems to be worsening.
Not long ago it was the eurozone that was perceived to be politically unstable, but this has moved on after the election success of Emmanuel Macron and renewed popularity of Angela Merkel. If this new trend of a weakening dollar persists for some time, it will have a significant influence on other asset classes.
Emerging markets are one of the biggest beneficiaries as they hold a large percentage of the outstanding dollar debt and as the dollar falls the local currency cost of their debt also falls.
A weaker dollar combined with good growth and low interest rates is a sweet spot for emerging markets, evidenced by their strong performance this year. In terms of sectors we would expect global miners to do well in this reflationary environment.
And the losers? The steady nature of the US dollar decline means it’s not immediately destabilising for markets, but if the trend continues, some areas of the market will start to struggle.
For example, the euro has been one of the strongest currencies against the dollar this year, having been one of the weakest in recent years. European exporters were a big beneficiary of the weak euro trend and are likely to suffer if its strength continues, and perhaps some of the laggards like US exporters will start to lead.
Through our macro views and themes we are exposed to areas of the market where this trend is clearly supportive, for example to emerging market equities and bonds, and to global miners.
Most of our US dollar exposure is hedged back into sterling, but this is a risk management decision where recently we have tended to hedge back our major overseas currency exposures to minimise currency risk.
This hasn’t always been the case and might not be the case in the future, but we have a fairly high overseas fixed income position right now where currency dominates volatility.
Our general philosophy is that trends in financial markets tend to persist for longer than expected, and this might well be the case for the US dollar. However, for reasons outlined above we focus on risk management with currencies, not speculation.
Henna Hemnani is an analyst within Miton Asset Management’s multi-asset fund range. All views are her own and should not be taken as investment advice.