US dollar soars amid investor jitters and rising yields

The US dollar continued its rapid ascent on Thursday, hitting multi-year highs against the euro, sterling and yen.

The US currency has been one of the few beneficiaries this year from a market battered by geopolitical fears and worries about the consequences of interest rate hikes by the Federal Reserve.

The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, rose 7.1% in 2022, outpacing everything from stocks to bonds to gold. That provided shelter for investors seeking protection from volatility elsewhere in the markets, while raising concerns about how a strong dollar could affect everything from multinational corporations to emerging market economies.

The dollar tends to perform well when investors abandon riskier investments and seek refuge in assets they perceive to be safer. Its status as the world’s reserve currency makes the dollar a particularly attractive safe haven.

Analysts also attribute its strength to the resilience of the United States economy and a central bank that is active in fighting inflation by raising interest rates. Investors now expect the Fed to begin a rapid series of rate hikes, including half a percentage point at its meeting next month.

Most of the dollar’s appreciation happened this month, said Stephen Gallo, head of European currency strategy for BMO Capital Markets.

The WSJ Dollar Index rose 0.74% to 95.89 on Thursday, even as the S&P 500 added 2.5%. It marked the index’s highest closing level since March 2020, when the coronavirus pandemic sent stocks tumbling and investors piled into the dollar.

The dollar has now climbed in all but two of the past 21 trading sessions, putting the currency within striking distance of a 20-year high. The dollar index reached 97.33 in March 2020 on an intraday basis, about 1.4% above its recent levels. Any breach of that level would be the highest level in the index since 2002.

Higher interest rates generally support the dollar by making US assets more attractive to investors looking for yield. Investors expect the Fed to raise short-term rates more aggressively this year than its central bank counterparts.

The Bank of Japan on Thursday reinforced its commitment to keep interest rates low despite rising inflation. The bank said it would buy 10-year Japanese government bonds at a yield of 0.25% every business day to ensure the yield does not rise above that level. This caused the yen to fall above 130 to the dollar for the first time since April 2002.

The European Central Bank, meanwhile, would continue to lag the Fed in monetary policy tightening, ECB President Christine Lagarde said earlier this month, noting that the Eurozone economy is expected to absorb a harder hit from the war in Ukraine.

The dollar rose 0.57% against the euro on Thursday, closing at $1.05, the lowest closing rate for the euro since 2017. Investors attributed the fall in the euro this week growing concerns about rising energy prices and declining economic growth.

Elsewhere in the currency markets, the greenback advanced 0.69% against the pound to its highest level since mid-2020. The pound sterling has lost more than 5% against the dollar since the beginning of the month.

The strength of the dollar has been one of the few bright spots in the markets this year.


Photo/Zuma Press

“When two of the world’s largest central banks maintain accommodative monetary policy on a relative basis to the Fed, those rate differentials…are a big part of dollar strength,” said macro strategist Charlie McElligott. -active at Nomura. International titles.

Also boosting the dollar, analysts and investors said: the war in Ukraine and fears that rising Covid-19 cases in China could lead to further pandemic shutdowns.

A strong dollar affects global economies and markets. S&P 500 companies generate about 40% of their revenue outside the United States, according to FactSet data, and a strong dollar makes it more expensive for companies to make sales abroad. Already this earnings season, companies like Alphabet Inc.

and Microsoft Corp.

mentioned the negative impact of a strong dollar on results.

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A stronger dollar also tends to weigh heavily on emerging markets and often drives foreign traders out of investing there. By driving down the value of emerging market currencies, a rising dollar makes dollar-denominated debt more expensive to repay. On Thursday, the dollar surged against emerging market currencies, further paring the gains some had made earlier this year. The greenback appreciated 1.3% against the Chilean peso and 0.9% against the South African rand. He reduced his initial gains against the Brazilian real.

The pace of the dollar’s rise this year has surprised some analysts and investors and has already begun to reset expectations for the rest of the year.

“I doubt this week my view that the dollar would give back some of its gains, and I’m starting to worry that we’ll have a stronger dollar for longer this year,” said Jane Foley, head of currency strategy. at Rabobank. .

“The global economic conditions that will lead to [a stronger dollar] are not pretty,” she said. “We are talking about Europe [economy] under potential pressure and the greater possibility of a lack of energy supply in Germany. We are talking about a slowdown in growth in China.

Write to Caitlin McCabe at [email protected] and Julia-Ambra Verlaine at [email protected]

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