The consequences of hyperinflation, the war in Ukraine, the energy crisis, tensions on the Taiwan Strait and fears of a recession are not sparing even the United States. Yet it is US Dollar Indexwhich measures the value of the US dollar in relation to a basket of foreign currencies, has just marked its third all-time high, settling at 109.478. This is even more surprising after Fed Chairman Jerome Powell’s hawkish words last week. It is therefore natural to ask what are the reasons behind this rally that has lasted since the beginning of the year, especially to understand how long it will last.
US dollar: 3 reasons to explain its strength
According to Jens SøndergaardCapital Group’s Currency Analyst, the first reason is certainly to be found in weakness of the currencies to which it is confronted. Both the euro and the Japanese yen, for example, have traded at their lows for many years (2001 for the euro and 1998 for the yen) and the euro recently touched parity with the US dollar with an exchange rate of 1 a 1 for the first time since 2002. The yen, on the other hand, moved almost perfectly in tandem with the 10-year US Treasury yield. As Treasury yields rose, the yen weakened, offering a textbook example of divergence. monetary policy: on the one hand the Fed which is tightening its pace and on the other the Bank of Japan (BoJ) which remains faithful to its zero interest rate policy.
The second reason is that the US economy remains stronger and healthier than the other major economies and the Fed’s aggressive stance of monetary policy to counter hyperinflation is a necessary panacea. In the rest of the world, growth is weak, inflation is mainly driven by energy prices, real wages are heavily compressed and central banks are forced to raise. rates based on biased metrics.
The third reason is due to the role of safe haven for the American currency: should recession fears materialize, the dollar, as in the past, will be the preferred safe haven for investors.
US Dollar: to rally for another 6 months at least
In light of these factors, the Capital Group analyst’s view is as follows:
“We believe the dollar can continue its rise for at least another six months. We expect the next six months to be very eventful in terms of market volatility, mainly due to recession fears. While the dollar is overvalued based on the various metrics we follow, we don’t see a catalyst for a decline in the short term. On the contrary, we expect the dollar to remain strong until we see signs of global growth stabilizing and indications of a spike in inflation around the world”.
The outlook for emerging currencies for the coming months
Looking at other currencies, in the opinion of Capital Group experts all emerging market currencies are particularly affordable based on the long-term scoreboard dell’asset manager.
“All in all, Asian currencies appear more attractive than those of Latin America. Asia’s fundamentals are better in terms of a current account surplus, better growth prospects and lower inflation rates. The currencies of Latin America, on the other hand, benefited from strong demand for commodities but, if global growth were to deteriorate in the next six to nine months, pro-cyclical currencies, which benefit from an economic recovery, could be penalized. In addition to political instability, Latin America also faces longer-term structural problems, such as deglobalization, supply chain relocation and climate change.”, explains Søndergaard.
In particular, the renminbi cinese has proven resilient against the dollar, thanks to its fixed exchange rate, and could further strengthen if China relaxes its “dynamic zero-COVID” policy, injects more fiscal stimulus into its economy, and economic growth resumes after the slowdown in the second quarter.
The Brazilian real, the Chilean peso and the Colombian peso Instead, they were sold off in the wake of recession risks, which caused the prices of copper, oil and industrial metals to collapse.