New York Fed President John Williams even suggested rate hikes if warranted.
Global markets are in 2024 facing a dynamic they did not expect.
Its power dollar is back and looks set to remain at high levels, notes Bloomberg.
Having started the year predicting that the dollar would weaken, investors were forced to revise due to the momentum of the US economy and inflation, elements which require the Fed not to cut interest rates yet.
With the International Monetary Fund forecast that US output will grow at twice the rate of its G7 peers, talk of “American exceptionalism” is rife and is supporting stocks and bond yields, increasing the dollar’s appeal.
In a time of increasing geopolitical turmoil, the currency continues to be the ultimate monetary safe haven.
Its relative index Bloomberg has recorded an increase over 4% this year, reflecting progress against all major developed and emerging markets.
The popular index indicated a downward trend at the start of the year, but has since reversed, recording the most upward momentum since 2019, according to data from Commodity Futures Trading Commission.
Readjustment
Among those readjusting their dollar strategies is the world’s second-largest fund manager Vanguard Group, which now speaks of sustainable power.
THE UBS Asset Management argues that the dollar likely has further momentum despite being 20% more expensive than usual.
Meanwhile, the Wells Fargo Investment Institute revised down forecasts for weakness by the end of the year and now estimates the currency will extends its rise until 2025.
“If other countries can’t match US growth and inflation, we have no choice but to buy the dollar,” said Ales Kutney, head of international rates at the Vanguard.
“What was once a very tactical trade for us has become much more of a long-term structural view of the sustained economic strength of the dollar and the US.”
The dollar’s recovery came amid a series of signs that the US economy avoided the slowdown that many expected. The labor market remained tight and manufacturing activity continues to expand.
The resulting persistence of inflation led the Fed chairman, Jerome Powell and policymakers to take longer than expected to cut interest rates.
Its president Fed of New York, John Williams he even suggested the possibility of repeated interest rate increases, if warranted.
Of course, the currency’s rise comes at a heavy price for its counterparts and other economies, which investors are also trying to cope with.
India and Nigeria are among countries seeing their exchange rates sink to record lows, while threats of intervention are being heard from Japan to Poland.
Central banks in developed markets such as Australia, the Eurozone and the UK may have limited ability to cut interest rates if weaker exchange rates put pressure on domestic inflation. Countries burdened with foreign debt, including the Maldives and Bolivia, as well as those heavily dependent on US imports, will be particularly hard hit.
In a sign of growing concern over the dollar’s rapid rise, the G7 reaffirmed its common stance on the possible effects of disorderly currency movements.
High scores
As markets reduce bets on Fed easing, Treasury yields bonds have shot up again in recent weeks, sending benchmark yields close to 5%.
The rise was a major factor in the attractiveness of the dollar, which also benefited from continued inflows into US stocks amid the artificial intelligence frenzy.
Contrary to reduced expectations for Fed easing, its chair European Central Bank,stated that policy makers they may be able to cut rates in June. Meanwhile, Japan lags so far behind the US in terms of growth that even the historic decision to end the world’s last negative interest rates failed to prevent Gen from hitting a 34-year low.
Another tailwind for the dollar is its role as an unparalleled safe haven in times of political or economic turmoil.
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