The King Dollar Remains Strong Despite Fears of a Global Market Crash.
The US Dollar is the most widely used currency worldwide and the primary reserve currency in use on a global scale. Because of its green hue, the USD is sometimes referred to as “The Greenback” and is a preferred medium of exchange for traders seeking to purchase assets made in or from the United States. Traders often try to purchase US Treasuries when risk aversion is strong, which might increase demand for US Dollars.
The U.S. dollar has risen to its highest level in over 20 years as a result of a concoction of concerns about global economic growth, Federal Reserve hawkishness (raising rates), and Euro weakness, and some investors believe there may yet be more gains to come.
The dollar index, which compares the value of the dollar to a basket of six major currencies, is up 12% this year and is on course to have its best year since 2014. Seven out of the previous ten years have shown an increase in the dollar index.
The dollar’s growth is driven by a number of reasons. Due to the worst US inflation in decades, investors anticipate the Federal Reserve will continue hiking interest rates more aggressively than many other global central banks, which will make the dollar more appealing to yield-seeking investors.
Nevertheless, some economists are concerned that the Fed’s and other central banks’ tightening of monetary policy might cause a worldwide recession. Because they think the US will do better than other nations in an impending global slump, other market players are buying and retaining dollars.
The value of the dollar has increased against each of the G10 counterparts, with the Japanese yen suffering the most as the Bank of Japan defies the trend of monetary tightening among central banks across the world.
The euro has dropped to a two-decade low and is now very near to parity with the dollar as a result of the rush for dollars amid growing concerns of a global recession and rising gas costs in Europe.
The euro might drop to as low as 0.95 versus the dollar, down roughly 7% from its present level, according to Deutsche Bank’s George Saravelos, if the Fed continues to raise rates even as Europe and the US enter a recession.
“We are not yet willing to go that far, but there has been a clear deterioration in the global and euro-specific growth outlook over the last two weeks which in our view justifies the dollar rally,” he wrote.
Kit Juckes, head of FX strategy at Société Générale, also believes the dollar may benefit in a global recession.
“The recession fear is global and unaffected by the U.S. data,” he wrote in a note earlier this week. “If the U.S. data are weak, we will expect European data to be equally weak.”
The dollar tends to rise in the months preceding the first interest rate increase in a cycle of rate increases, then declines after subsequent rate increases, according to history.
The dollar hasn’t slowed down much so far, however. Since the Fed’s first rate increase since December 2018 on March 16, the dollar index has increased by 8%.
By lowering import prices, a strong dollar may aid the Fed in its battle against inflation. Additionally, since American businesses must convert their international revenues into dollars, it puts pressure on their bottom lines and reduces the competitiveness of American exporters’ goods abroad.
Microsoft Corp. joined other American businesses in June in reducing their expectations for profit and sales in the fourth quarter as a result of the higher dollar.
With traders attempting to keep up with the fast-shifting global interest rate environment, the strength of the dollar has been accompanied by a substantial increase in currency market volatility. The last time the Deutsche Bank Currency Volatility Index was updated, it stood at 11.09, its highest level since March 2020, which reflects expectations for fluctuations in FX markets. The dollar has increased by 0.5% or more in 25 days so far this year, which is the highest for any similar period since 2015.
Speculators on the International Monetary Market tend to anticipate greater dollar increases, as seen by the $13.62 billion in net bullish bets on the greenback. According to the most recent statistics from the US Commodity Futures Trading Commission, traders have been holding a positive position on the dollar for over a year now, which is the longest such run since March 2020.
The real big question is ‘are we waiting’ for the greenback’s inevitable collapse?!
online sources: finance.yahoo.com, ig.com
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