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The Dollar is Strengthening in 2023: What’s Behind the Surge?

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The Dollar is Strengthening in 2023: What’s Behind the Surge?

Dollar Strengthens After Bumpy 2023

The US dollar index is up 2.8% year-on-year as of Friday morning, following a bumpy 2023. After a drop last November, the dollar is back on the rise, gaining strength as Wall Street accepts that interest rate cuts will come later than expected.

Federal Reserve Chair Jerome Powell’s January announcement dashed investor expectations, saying that interest rate cuts won’t likely begin in March as widely believed, following positive economic data. The US economy created 353,000 jobs in January, indicating resilience despite high interest rates. The dollar’s strengthening is good news for American businesses and consumers, but it’s a challenge for US companies that earn most of their revenue overseas, as it means fewer dollars on their bottom line.

The decisions of other countries to adjust interest rates also affect the greenback’s trajectory. A potential cut in the European Central Bank’s rates by President Christine Lagarde could continue to raise the value of the dollar, according to LPL Financial’s Quincy Krosby. The 10-year US Treasury yield rising above 4% is also giving the US currency a boost.

However, Minneapolis Fed President Neel Kashkari believes rates may have found a new, higher neutral level after the pandemic, arguing that it may give the Fed time to evaluate upcoming economic data before cutting the federal funds rate. Regardless, investors see the Fed beginning to cut rates in May or June, expecting the dollar to ultimately decline.

Red Sea Crisis Challenges Global Trade

Attacks on container ships in the Red Sea, which began in late November, have been causing chaos for weeks. The resulting delays and additional costs have fueled concerns that consumers, already facing inflation, could experience further price hikes. The war between Israel and Hamas has led to an “almost widespread exodus” of large container ships, forcing longer routes in an attempt to avoid the area.

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The Suez Canal, which represents 10-15% of world trade, including oil exports, and 30% of the world‘s shipping volume, has been significantly affected by the increased conflict, potentially causing a yearlong disruption, according to shipping giant Maersk.

Janet Yellen Anticipates Banking Stress Caused by Empty Office Buildings

Secretary of the Treasury Janet Yellen expressed concerns over the increasing number of vacant commercial properties and the stress that it may inflict, especially on smaller banks. Despite this, she does not perceive it as a systemic risk to the financial system but warned that some banks may be facing stress from the high building vacancy rates, high interest rates, and falling valuations.

Speaking before the Senate Banking Committee, Yellen shared that the larger banks’ exposure is “pretty low.” She acknowledged the obvious stress and loss associated with the situation, indicating it could concern some banks, but overall maintained that the financial system is well-capitalized and sound.

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