1. The U.S. dollar index (DXY) is up as much as 15% in 2022. The dollar is at a 20-year high.
The value of the U.S. dollar has surged in recent months, driven by the Federal Reserve’s aggressive interest rate raises and the hot U.S. economy.
From the below chart, we can see, USDJPY rose the most in 2022, then USDGBP, USDCNH, USDAUD, USDSGD.
Data from Trading View
- The yen has depreciated by about 30% against the dollar this year, and the sharp drop in the exchange rate highlights the dilemma of Japan's monetary policy.
- The exchange rate of the pound against the US dollar fell to the lowest level since 1971;
- the exchange rate of the RMB against the US dollar fell to the lowest level in 14 years, and is expected to fall below CNY7.5.
- Experts predict that the Australian dollar exchange rate may fall below 60 cents.
2. Logic on Why is the Dollar So Strong?
The U.S. central bank has raised interest rates several times in 2022 in an attempt to curb rising prices. The move raised borrowing costs. That means more returns from owning financial products such as U.S. government bonds, making them more attractive to investors.
Bonds are a way for the government to borrow money, and the government promises to pay the bond interest in the future. As a result, bonds are generally considered a safe investment. In July 2022 alone, foreign investors purchased 10.2 billion U.S. government bonds, and as much as 7.5 trillion U.S. bonds were owned by foreign investors.
Investors had to buy dollars to buy these bonds, which in turn caused the dollar to appreciate. When investors sell other currencies to buy dollars, other currencies experience depreciation Naturally.
Source: businessinsider.com
Plus the pound fell sharply against the dollar after the UK government announced plans to cut taxes. A surge in natural gas prices triggered by the conflict in Ukraine has left many economies in Europe and Asia struggling. Investors tend to buy the U.S. dollar when the global economy is under stress, as the U.S.’s huge market size makes it a “safe haven.” This is also what makes the dollar appreciate.
But a strong dollar can also hurt U.S. companies that make profits abroad. That’s been a headwind to companies that conduct business largely overseas and are therefore subject to an unfavorable exchange rate. For like $Apple(AAPL)$ and $Starbucks(SBUX)$ .U.S. companies listed on the $S&P 500(.SPX)$ are thought to lose $100 billion in international sales.
3. When Will the Dollar Peak?
Goldman Sachs: The dollar may be closer to peaking than markets think.
In a new report on Monday, Goldman Sachs analysts looked at previous all-time highs for the U.S. dollar and pointed out that the dollar is likely to peak ahead of Fed easing:
It might make sense to consider the mid-1970s and mid-1980s, when inflation was equally high.
These similarities suggest that a peak in the dollar may not be necessary to see the Fed have eased significantly or inflation is at a bottom; and once it is clear that U.S. rate hikes may be close to a pause, or if the Fed’s voice about a policy shift is credible, even if U.S. economic activity is It is still slowing down, and it may also peak early.
Previously, Goldman Sachs had pointed out that the dollar's all-time highs coincided with bottoming in U.S. and global economic growth and easing by the Federal Reserve. So, Goldman Sachs said at the time that it indicated that the current peak in the dollar was far from happening, as the bank did not expect the Fed to start cutting rates until 2024.
But in this week's report, Goldman Sachs changed that view:
Sometime in the first half of 2023, we may see these factors come together: We may be past the worst of the European winter recession, the new leadership of the Bank of Japan may gradually begin to tighten policy, and this Meanwhile, U.S. interest rates have finally peaked, and U.S. inflation and labor markets have moderated. But we haven't done that yet.
In addition, CNBC's Jim Cramer also said on Monday that the soaring dollar may soon peak.
A strong dollar has become a heavy weight around the neck of a market that has already been beaten, but now, according to Carley Garner,
"the charts suggest the dollar may be peaking. Everything else, stocks, commodities, bonds, have pulled back this year. The dollar is the last holdout, and it won't last.”
To explain Garner's analysis, Cramer looked at the weekly chart of the U.S. dollar index from 2017.
Source:https://www.cnbc.com/
According to Garner, the dollar is already considered to have made a “dramatic top,” with the last three peaks following a trend line dating back to 2016. The dollar is just below the trend line, which is the upper limit of resistance and a possible reversal point, he said.
Garner expects the dollar to fall if that ceiling is not breached. The dollar index is at 112 right now, and Garner wouldn't be surprised if it drops to 105.
Jim Cramer said, adding that Garner thinks the dollar index could fall all the way to 97, the level it was before Russia invaded Ukraine earlier this year.
Comments
With inflation at 40 year high, the Feds main focus is to quell it with aggressive interest rates hikes. However there was recent talks that the Feds are considering slowing down the rate hikes and that have resulted in the recent markets uptrend.
Nonetheless at some point in time, the Feds will slow down the interest rates hikes. That will dampen the strength of the US Dollar. Let's hope it would be soon.
Thanks @Capital_Insights for your excellent insight on the prevailing strength of the US Dollar.