WASHINGTON – The quick rebound in global stocks last week following Britain’s vote to leave the European Union was welcome relief to investors. Many surmised that markets were now looking past the so-called Brexit risks; some even declared victory.
Not so fast.
After initially recovering from the shocking June 23 referendum results, stocks in Europe and Asia extended losses Wednesday. Major U.S. stock indexes opened lower, with the Dow off about 80 points, or 0.5 percent, at the opening bell after falling 108.75 Tuesday. By noon Eastern time, the Dow had largely recovered its losses.
Meanwhile, U.S. and Japanese government bond yields hit record lows as anxious investors continued to run for safety. And the British pound fell to a fresh 31-year low – to less than $1.30 – in what some analysts see as a sign of prolonged volatility ahead for financial markets and increased contention among nations especially over currency values, which are critical in global trade and capital flows.
“It really looks like we’re on the cusp of FX (foreign exchange) wars,” said Christopher Vecchio, currency strategist at FXCM Inc., an online foreign exchange trading broker. “Competitive devaluations seem to be very much on the horizon.”
The U.S. dollar now looks to be strengthening anew. And that will further strain American exports as a weaker dollar makes U.S. products more expensive in foreign markets, in turn pushing the Federal Reserve to stay on the sidelines of interest rate action.
The Commerce Department said Wednesday that total U.S. exports of goods and services slipped in May and were down 5 percent in the first five months of this year compared with a year earlier. Imports were up 2 percent through May, meaning an increase in the politically sensitive U.S. trade deficit.
The dollar had risen from late 2014, reflecting increasing oil prices, indications of forthcoming Fed rate hikes and the relative strength of the American economy that attracted inflows of capital. That rally peaked early this year and looked to be retreating, but the British referendum to quit the EU has brought a resurgence of demand for the dollar as investors seek the security of U.S. Treasury notes.
Brexit has heightened investors’ fears and uncertainties in an already sluggishly growing global economy. Experts worry about a recession in Britain, the EU’s second-largest economy, and a wider economic and political fallout to the region and potential spillovers to the world, including the U.S.
The British pound is down about 14 percent against the dollar since the referendum. Central banks in Europe are likely to keep or lower rates in an effort to boost confidence and growth, which will put downward pressure on the pound as well as the euro.
Marc Chandler, a veteran currency trader and expert on dollar trends in New York, said he could see the pound dropping to $1.15 and the euro, now fetching about $1.10, falling to as low as the mid-80-cents level as it did in 2000 when there were uncertainties about its viability.
“I’m in the bullish-dollar camp,” Chandler said. That’s good news for U.S. consumers traveling to Europe, he noted, but it’ll pinch not only exports but also American companies’ bottom lines when they repatriate earnings from Europe and elsewhere back home. It’s also not welcomed by Americans on fixed incomes and other savers who have been waiting long for higher rates.
Brexit is being felt in Asia, too. Like the dollar, the Japanese yen is a “safe-haven” currency, and it has jumped in recent days, much to the chagrin of Japanese officials who want to preserve their exports and the little economic growth that their nation has seen.
China, meanwhile, has been carefully managing its currency in the face of rising pressures. On Wednesday officials in Beijing set the yuan, which trades within a band of 2 percent, at 6.6857 to the dollar. That is the weakest since late 2010.
Analysts at UBS Securities in Hong Kong said that the yuan, also known as the renminbi, is likely to weaken further against the dollar, forecasting it to move to 7 to 7.2 to the greenback at the end of 2017. That is likely to fuel complaints along the way from Washington lawmakers and others, who have long accused the Chinese of manipulating its currency to gain an edge in trade.