BNY Mellon
USD Strength Not Due to Interest Rates
Although it faltered somewhat at the end of last week, the US dollar has been on a tear since the middle of August. The US Dollar Index (DXY) was up almost 5% between Aug. 11 and Sept. 6, reaching 110.2, its highest level the beginning of the 21st century.
The Federal Reserve’s hawkish policy setting (including our expectation of a 75bp hike on Sept. 21) seems like an ideal candidate to explain this recent bout of dollar strength. However, we think it has less to do with interest rates and more to do with growth differentials, idiosyncratic factors in other currencies (like the euro and sterling) and stagflation risk around the world. Relative to the growth outlook across the world, the US is probably better-placed than most of its DM peers, making the dollar the clear winner.
Interestingly, since the beginning of the year, the dollar has appreciated almost twice as much against advanced economy currencies as it has against emerging economy currencies. The Fed’s trade-weighted dollar index is up around 11% this year against DM currencies but up only around 4.5% against EM currencies. To us this reflects a relative worsening of growth and inflation prospects in the developed versus emerging worlds.
Overall DM growth in 2022 is expected to be 2.3% according to consensus forecasts, down from 3.8% at the beginning of the year. EM growth forecasts for this year have also been revised lower, to 3% from 5%. More revealingly, 2023 forecasts have been ratcheted down much more for DM economies, 1.1% vs. 2.4%, than for EM economies, 4.4% vs. 4.8%.
Credit Agricole
The USD has been seen as the key beneficiary of the unfolding global economic slowdown: (1) the US economy is seen as more resilient than its European and Asian counterparts that are plagued by geopolitical or pandemic headwinds; (2) the Fed has emerged as one of the more hawkish G10 central banks in a boost to the USD’s (real) rate appeal; while (3) risk-averse investors continue to seek refuge in high-yielding USD cash. We still think that the longer-term risks for the USD could be on the downside, however. A severe global growth slowdown is not our central scenario and, with the Fed potentially past its peak hawkishness while other G10 central banks are still tightening, we could see the USD underperforming high-yielding proxies if the global economy heads for a soft landing. Even in the case of a global economic hard landing, however, the USD could underperform the likes of the JPY, CHF and EUR, which could be boosted by repatriation flows.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.