By Vivien Lou Chen
Amid all the wild volatility of 2022, there’s one thing investors can still count on: the soaring US dollar. The ICE US Dollar Index, which measures the strength of the US dollar against a basket of six other currencies, rose 0.7% on Wednesday as the greenback continued to beat its major counterparts like the yen and sterling, while generally wreaking havoc around the world.
It comes at a time when the three major equity indices are sinking further into double-digit percentage losses this year, global government bonds are stuck in one of their biggest bear markets ever, and even gold had a turbulent year. The raging US dollar just recorded its strongest quarter in at least 7 years as investors seek safety to take a step back.
First, currencies always trade relative to what is happening everywhere else in the world, and right now the rapid rise in U.S. interest rates relative to other countries is the main reason why the dollar appreciates. In technical language, this is called the interest rate differential or the difference in monetary policy between central banks. The Federal Reserve remains resolute in its efforts to reduce inflation with aggressive and continued rate hikes, especially after September’s higher-than-expected consumer price index produced an overall rate of 8.2% year-on-year. Meanwhile, Europe – which announced an annual inflation rate of 9.9% for September on Wednesday – is facing an energy crisis that the International Monetary Fund says puts the European Central Bank on a lesser trajectory. for interest rates. And in Asia, continued low inflation in Japan and China allowed central banks to buck the global tightening trend. All over the world, this interest rate differential consequently weakens a band of currencies against the dollar.
The dollar’s strength has been so relentless that it has even prompted questions about the need for intervention along the lines of the 1985 Plaza Accord, although analysts doubt that a coordinated effort to control the dollar green to occur. One of the main reasons is that a strong dollar helps contain inflation domestically, by reducing the cost of imports, and thus helps the Fed do its job to some extent. about a Plaza Accord-style intervention
“The struggle right now is how quickly this dollar strength has happened, where it can get intense and problematic,” said Tom Nakamura, portfolio manager and currency strategist at AGF Investments in Toronto, which managed 38 .4 billion Canadian dollars ($27.8 billion). from September.
“Such a strong move can trigger a liquidity or credit crunch as companies in other countries try to meet their dollar-denominated obligations. I don’t think we’ve gotten to that point yet. But speed is something. important thing, whether it is in the foreign exchange market or interest rates, because there is a process of adjustment. The faster this happens, the less economies around the world will be able to adapt to it and the gently absorb,” he said.
There are several ways to judge the performance of the dollar and one of the most common is to use the ICE US Dollar Index, which is calculated approximately every 15 seconds from a stream of spot prices across different currencies. . Six currencies – the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc – are weighted against the dollar to arrive at a calculation of US currency performance.
The index rose nearly 18% in 2022 and was trading just 1.6% below a more than two-decade high set in late September, according to FactSet. Interestingly, Brent Crude is the only asset this year that has managed to outperform the US. Dollar Index, according to figures provided Monday by the BlackRock Investment Institute, the research arm of the world’s largest fund manager.
You may have recently heard the dollar described as a wrecking ball and it’s easy to see why. On the one hand, foreign governments and private companies have trillions in dollar-denominated debt that they are struggling to repay. On the other hand, American multinationals that do business in several countries are seeing their profits and sales erode. According to an estimate published by Credit Suisse Group AG, each jump of 8% to 10% in the dollar leads, on average, to a drop of about 1% in profits for American companies. Read: Inflation is yesterday’s news. A strong dollar is the next big threat to American multinationals. the U.S. currency and cut its sales forecast for the year, even though it reported third-quarter earnings that beat estimates. Streaming giant Netflix (NFLX) linked dollar strength to a weaker Q4 outlook, and Procter & Gamble (PG) blamed the greenback and rising inflation for fiscal year earnings which will likely be at the bottom of the company’s forecast. James Solloway, chief market strategist at SEI, which oversees about $1.3 trillion in assets, said he wouldn’t be surprised to see a temporary reversal in the dollar’s trend. Meanwhile, a team at JPMorgan Chase & Co. said that with investors fleeing nearly every asset class this year and fringe cash hitting a 10-year high, “we remain long the dollar as a hedge. against a hawkish Fed in the near term.”
Equity portfolios suffer
While that’s not always the case, analysts say the strong dollar has clearly exacerbated the headwinds facing the US stock market this year. That’s a “clear negative” for the S&P 500, with industrials, materials, consumer staples and technology being the most sensitive to a stronger U.S. currency, according to a report from RBC Capital Markets. In contrast, stocks in sectors such as financials, utilities and real estate investment trusts should be more insulated, he said. Read: US dollar dominance tends to hurt these market sectors less stock market, according to RBC and The Dollar Keeps Hitting New Highs. The stock market doesn’t like it
At least there is Paris
Investors suffering from nagging headaches from double-digit stock market losses in 2022 can be forgiven for simply wanting to walk away from it all, if they still have the cash to do so. Today’s strong dollar benefits American travelers when it comes to booking hotel stays in Europe, the UK, Japan and just about everywhere else and paying for food and drink tours. fun.
See: The strong dollar is making travel to Europe very attractive right now – with an important caveat. Some well-heeled Americans are even taking it a step further by splurging on European homes, where a single purchase can end up costing tens of thousands of dollars less than it was earlier this year. “The concept of dollar strength can be good in different situations,” AGF Placements’ Nakamura said by phone Wednesday. “This could ease inflationary pressures that would otherwise have been stronger domestically. Foreign exporters can benefit from weaker currencies against the dollar, which means Americans can take advantage of cheaper imported goods. For the average American , they can also benefit from a dollar that stretches further if they travel abroad.
– Vivien Lou Chen
(END) Dow Jones Newswire
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