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Why the US dollar seems unstoppable

Being late companion

Most strategists expect greenbacks to be particularly strong against low-interest-rate currencies such as the euro and yen, as central banks are expected to lag behind the Fed’s rate hikes.

“Anyway, the view of the winning dollar may dominate for a while.”

Bloomberg Intelligence Chief G-10FX Strategist, Audrey Child Freeman

In an interview with Bloomberg TV, CIBC’s Jeremy Stretch said, “In the United States, we’re getting a little closer to that tapering story, and other funding currencies are still quite far away.” “Central banks like the ECB will probably be on hold for the next few years and will eventually support the long dollar position.”

Bets on faster Fed rate hikes send Treasury yields to the highest level since March 2020, about 101 basis points for German counterparts and 44 basis points for Japanese peers Widened the gap to the point.

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As a result, analysts have followed currency and bond movements, with ICE’s dollar index and 10-year Treasury yields already above consensus year-end expectations.

Ultimate heaven?

This year’s dollar appreciation was set in September, when investors sought safety as risky assets were ruined by a combination of turmoil in China’s real estate sector, slowing global growth and accelerated inflation. As the energy crisis continues to upset the market, it could rise further from the demand for protection.

According to Kevin Thozet, a member of Carmignac’s investment committee, the unprecedented rise in energy prices was also a major driver of the dollar while hurting the euro. He has been increasing his exposure to greenbacks over the past month or so.

“This move is likely to be related to what’s happening on the product side,” he said. “The United States is self-sufficient in that respect, not the same in the euro area.”

The euro-dollar pair has remained close to a low that has not been seen since July 2020, partly due to the appreciation of the dollar. Speculators have unleashed long euro bets since the second half of last year, and last week’s position has turned the most bearish since March 2020.

Strategists expect the greenback to be particularly strong against low-interest-rate currencies such as the euro and the yen, as central banks are expected to lag behind the Fed’s rate hikes.credit:Bloomberg

JP Morgan’s Mira Chandan wrote in a study note that the weakening of global growth forecasts combined with rising inflation made the US currency an even more attractive bet. “The background helps to own the dollar on a broader basis, not only against high beta currencies, which are usually sensitive to growth, but also compared to other defensive currencies like the JPY.”

The dollar as a shelter is a relatively new phenomenon. In times of global tough times, Forex traders have historically sought stability in the Japanese yen and the Swiss franc. However, according to CIBC’s stretch, unbeatable liquidity and expanding yield advantages make the US currency an attractive place to save value in the event of market turmoil.

“Investors want some degree of security and security, and in that context, I think we can go back to the broader dollar story from a Forex perspective,” Stretch said. The one-month risk reversal of the dollar-yen pair touches on the bearish distance in Japanese currencies for the first time since June this year.

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According to Mazen Issa, senior FX strategist at TD Securities, the Fed’s policies are likely to benefit the dollar over the coming months, not just against traditional shelters. Greenbacks also tend to benefit from their seasonal advantage over other G10 currencies in the fourth quarter, he said.

“Is the dollar a safe haven? Probably so against the background, but I think it’s about changing monetary policy risk,” said Issa. “Now there seems to be a need to respect the dollar.”

Bloomberg

Why the US dollar seems unstoppable

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