Dollar’s wrecking-ball rally not done yet

Crushed euro and yen to two-decade lows and sterling to its lowest in nearly 40 years

SINGAPORE:

A rally that has the dollar on course for its best year since 1984 has further to run, traders and analysts say, suggesting more pain almost everywhere else as other currencies either crumble or require rapid rate hikes to stay put.

The rise - the dollar is up nearly 15% against a basket of currencies this year - has already been a wrecking ball through foreign exchange markets, crushing the euro and yen to two-decade lows and sterling to its lowest in nearly 40 years.

Tuesday’s surprisingly hot US inflation data led the latest surge as investors price in larger and faster US rate rises in response and are even speculating the Federal Reserve could hike by a full percentage point next week.

That sort of outlook, and the backing for the dollar in markets, is a direct challenge to global central banks, who face a choice between watching their local currencies weaken, or slowing the process by either selling dollars or raising rates, risking a sharp slowdown in economic growth.

“I don’t think there is anything that can stop the dollar,” said Rabobank strategist Michael Every, as long as US rates are rising.

“There will be intermittent phases where the market might try to delude itself and pretend what is happening isn’t happening,” he said. “(But) we see the dollar significantly stronger by year-end.” The US dollar index, which measures the greenback against a basket of six major currencies, was at 109.60 on Wednesday, barely below early September’s 20-year peak at 110.79. Its year-to-date gain is just shy of 1984’s 14.9% full-year rise.

Gains against individual majors have been immense, with the dollar up about 14% on the euro this year, 17% on sterling and nearly 25% on the yen. Interest rates have been a major driver, as higher rates give dollar bonds and deposits attractive yields. Outside the United States, major economies’ rates trajectories have seemed less aggressive, or stand in stark contrast.

Published in The Express Tribune, September 15^th, 2022.

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