Analysis: Hawkish Fed, strong US economy keeps dollar king of currencies

Photo illustration is a 100 dollar bill taken in Tokyo on August 2, 2011. REUTERS/Yuriko Nakao/File Photo/File Photo

NEW YORK (Reuters) – The U.S. dollar soared this year to a 20-year high. There are still plenty of bulls betting that the US dollar will have a leg to continue rising thanks to the Fed’s hawks and economic news. other major economies.

The dollar has risen about 13.5% against other currencies this year at its strongest pace in almost 40 years, while the euro has fallen about 12% below par to its lowest level in 20 years.

With aggressive rate hikes by the U.S. Federal Reserve and buyers seeking a safe haven to escape the Russia-Ukraine war and other global uncertainties, the dollar has been a hit with investors. has become a sure bet for

The US dollar has risen against all G10 currencies, gaining 19% against the Japanese yen and 15% against the British pound. ,

“We’ve been structurally bullish on the dollar over the last 15 months… I feel like it’s a little bit further down the road, but we’ve found reasons to change,” said Shahab Jalinos, global head of FX strategy at Credit Suisse Group. It has not been done,” he said.

Analysts at JPMorgan say recent U.S. economic data on inflation and employment “encouragement” is the main reason for the continued strength of the dollar, compared to widening “vulnerabilities” in Europe and China. did.

The U.S. consumer price index rose at an annualized rate of 8.5% in July, down from a reported 9.1% in June, but an unexpected acceleration in job growth in July pushed the economy into recession. concerns have abated.read more

The same cannot be said for other major countries.

The Bank of England predicts the UK will enter a recession later this year. This is because higher energy prices will help push inflation into his double digits.

Europe is now approaching double-digit inflation. This is largely due to the ongoing Russian-Ukrainian conflict and accompanying energy crisis. Economists see the risk of the African continent slipping into a hard-to-break wage-price spiral, making investors reluctant to buy the euro even after the sharp decline.

“Europe’s biggest concern is energy.

Meanwhile, China’s central bank cut key lending rates this month in a surprising move to revive demand after the economy unexpectedly slowed in July.read more

Elsewhere in the world, a strong dollar can help some countries with exports and trade balances. Government to pay off dollar debt.

“A lot of the reason the dollar is gaining ground is simply how the U.S. can defend itself against all the negativity that has happened so far,” said Juan Perez, trading director at Monex USA. Because I’ve seen it,” he said.

interest rate hike

Rob Howarth, senior investment strategy director at U.S. Bank Wealth Management, said aggressive Fed rate hikes aimed at keeping inflation in check have made the dollar more attractive, while U.S. Treasury yields have pushed many ahead higher than the country, and said the trend was likely to continue. .

“We see no change in the basic paradigm that the Federal Reserve is still the most aggressive of the major central banks,” he said.

At the central bank’s annual meeting in Jackson Hole, Wyoming, Fed officials reiterated they would raise interest rates and keep them at that level until inflation is contained in the economy.

Investors remain bullish even with dollar high.

Speculators’ net long positions in currencies rose to $13.37 billion last week, the largest number of positions since July 2021, according to Reuters calculations based on U.S. Commodity Futures Trading Commission data released on Friday. is almost identical toread more

Rancioni believes the dollar is overvalued in the long run, but is reluctant to bet on it. “It’s very difficult to go against the dollar at this point,” he said.

Investors will listen closely to Fed Chairman Jerome Powell at Friday’s Jackson Hole meeting to get more clarity on his thoughts on the economic outlook.

Quincy Crosby, chief global strategist at LPL Financial, said: “If Chairman Powell even suggests that inflation is easing and supply chain challenges are easing… such words are more likely than the ECB. Combined with strong rhetoric, it could put pressure on the dollar.”

Reported by Saqib Iqbal Ahmed. Edited by Megan Davies, Michelle Price and David Gregorio

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