The dollar index last week broke 100, an important psychological barrier. If the dollar rises another 10%, the outlook for the Asian currencies seems worrisome, especially for the Hong Kong dollar and the Korean won.
From the technical analysis perspective, the dollar index rose above 100 last week, which could be seen as a “clear break,” above the bear market trend.
In the past 35 years, there have been only two major breakthroughs: The first time in 1981, the dollar index rose 60%; the second in 2000, an increase of 20%.
Up till now, the dollar index rebounded only 6% from the end of September. Compared with the previous two historical breakthroughs, this is nothing. If the dollar rises another 10%, what effect will it have on the Asian currencies?
Even if the dollar index increases only 10%, the Asian currencies are under a lot of pressure. First, China’s renminbi may depreciate to 7.5 yuan against the dollar. People’s Bank of China has already allowed the renminbi’s depreciation against the dollar for 11 consecutive trading days since the US Presidential Election.
The appreciation of the dollar and the devaluation of the renminbi will hit the Asian currencies hard. The Malaysian dollar, the Singapore dollar, the Philippine peso, the Indian rupee, the Indonesian rupiah and the won have all been under pressure to depreciate recently, and the devaluation is likely to intensify.
Most of the Asian economies reply heavily on export. The depreciation of their currencies against the dollar is not a bad thing because their goods are cheaper in the U.S and hence, sales can be increased. However, their corporations may run into losses in the exchange rates. The consequences of a strong dollar are quite complicated.
The good news is it’s a great time for Americans to travel abroad. UK tops the list because its exchange rate has fallen from 1 US dollar for 0.67 British pounds to 1 dollar for 0.8 British pounds since the infamous Brexit. Europe looks good, too. I remembered I could only get 70 cents euro per US dollar when I went to Amsterdam and Paris 5 years ago. Right now, it’s almost 1 to 1.