New York (Reuters) – The U.S. dollar is at its highest level in about 20 years because of worries about global growth, hawkishness from the Federal Reserve, and the weakness of the euro. Some investors think there may be more gains ahead.
The dollar index, which compares the dollar to six major currencies, is up 12% against a basket of its peers in 2022. This is on track to be the best year for the dollar since 2014. In seven of the last ten years, the measure has gone up.
The dollar’s long rise, https://fingfx.thomsonreuters.com/gfx/mkt/zjvqklbzwvx/Pasted% 20image% 201657050054394.png
The dollar’s rise is due to more than one thing. Investors think that the Federal Reserve will continue to raise interest rates more aggressively than many other central banks around the world because of the worst inflation in the U.S. in decades. This will make the dollar more attractive to investors who are looking for yield.
At the same time, some analysts worry that the Fed’s and other central banks’ plans to tighten money could cause a recession around the world. Others in the market are holding dollars because they think the U.S. will be better able to handle a coming global recession than other countries.
https://graphics.reuters.com/USA-DOLLAR/dwpkrmwnavm/chart.png
The dollar has gone up against every other G10 currency, but the Japanese yen has been hurt the most because the Bank of Japan is going against the trend of central banks around the world tightening their money supply.
As the risk of a global recession grew, people rushed to buy dollars. This, combined with rising gas prices in Europe, pushed the euro to its lowest level in 20 years and brought it close to the dollar.
George Saravelos of Deutsche Bank said that if the Fed keeps raising interest rates even as Europe and the US fall into a recession, the euro could fall to as low as 0.95 against the dollar, which is about 7% lower than where it is now.
“We aren’t ready to go that far yet,” he wrote, “but there has been a clear worsening in the global and euro-specific growth outlook in the last two weeks, which we think justifies the dollar rally.”
A global recession could be good for the dollar, according to Kit Juckes, who is in charge of FX strategy at Societe Generale (OTC: SCGLY).
In a note earlier this week, he said, “The fear of a recession is global and has nothing to do with U.S. data.” “If the U.S. data is weak, we will expect the European data to be weak as well.”
The U.S. dollar index during times when interest rates went up.
History shows that the dollar tends to go up in the months before the first interest rate hike in a cycle of rate hikes. The dollar tends to go down after the first rate hike.
So far, though, there aren’t many signs that the dollar will slow down. Since the Fed raised interest rates on March 16—the first time since December 2018—the dollar index has gone up by 8%.
A strong dollar could help the Fed fight inflation by making imports cheaper. At the same time, it makes U.S. exports less competitive abroad and hurts the bottom lines of U.S. companies that need to turn their foreign profits into dollars.
Microsoft Corp (NASDAQ: MSFT) cut its fourth-quarter profit and sales forecasts in June.It was one of a number of U.S. companies to do so.
https://graphics.reuters.com/USA-DOLLAR/egpbkgdemvq/chart.png GLOBAL-FOREX-DOLLARS
As the dollar has gotten stronger, the currency market has become much more volatile as traders try to keep up with how quickly interest rates change around the world. The Deutsche Bank’s (ETR: DBKGn) Currency Volatility Index, which measures how much currency markets are expected to change, was last at 11.09. This was the highest level since March 2020. This year, the dollar has gone up by 0.5% or more on 25 days, which is the most for a similar time period since 2015.
The dollar is strong, according to https://fingfx.thomsonreuters.com/gfx/mkt/gdvzygolepw/Pasted%20image%20201657053956783.png.
Speculators in the international monetary market seem to think that the dollar will keep going up. They have bet a total of $13.62 billion that the dollar will go up. The last data from the U.S. Commodity Futures Trading Commission showed that speculators have been bullish on the dollar for almost a year. This is the longest bullish streak since March 2020.