Global financial markets are facing a dynamic they did not expect in 2024. The power of dollar is back and looks set to stay high.
Having started the year predicting that the dollar would weaken, investors were forced to revise due to the dynamics of the US economy and inflationelements which require the Federal Bank of the USA not yet to proceed with a reduction in interest rates.
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 more than 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.
Among those adjusting their dollar strategies is the world’s second-largest fund manager Vanguard Group Inc. which now speaks of sustainable power. THE UBS Asset Management argues that the dollar has probably further dynamics, 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 Kutni, head of its international rates division 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 Williamseven suggested the possibility of repeating interest rate hikes, 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 group of G7 reaffirmed its common position 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, Christine Lagarde, 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.
As stated by its strategic analyst Bloomberg, Mary Nicola“underlying dollar strength will remain as long as US exceptionalism and persistent inflation continue.”
“As long as the US economy is stronger than the rest of the G7, the dollar will be strong against other currencies,” said the economist Berkeley, Barry Eichengreenadding that “this may not please everyone, but there is little that can be done.”
For some analysts, including Marko Papic her Clocktower Group, the strength of the US currency can be a positive for Europe, China and Japan.
“He would help drive one global recovery, given that most of the rest of the world is export-oriented,” said the chief strategist.
While escalating tensions in the Middle East provide fresh impetus to the dollarits momentum is likely to last well beyond the conflict.
“I still expect the dollar to be the ultimate winner as the headwinds fade,” said a strategist at Commonwealth Bank of Australia, Carol Kong, referring to the latest developments in the Middle East. “US energy independence and high yields are likely to keep the dollar attractive.”
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