Why dollar is battering euro, Japanese yen and Chinese yuan

A force which the global financial markets was not prepared for in 2024 is already affecting them: The dollar is strong again and seems to be here to stay.

The US dollar index closed at 106.26 index points on Tuesday, the highest level since early November. The index gauges the strength of the US dollar versus six other currencies

The dollar has risen over the last week, in large part due to the impressive performance of the US economy. This month the currency retains the top haven for investors fleeing political or economic unrest, which is another factor supporting it. Less than a week after Tehran’s rocket and drone onslaught, Israel launched a retaliatory strike on Iran, which put the currency’s role as a haven on full display from drawing in any significant purchasers.

Asia is feeling the effects of the strong dollar

This week, the U.S. dollar rose to a new 34-year high versus the yen as investors followed the Federal Reserve’s higher-for-longer interest rate attitude.

The yen ranges close to a multi-decade low ahead of Tuesday’s European session, unable to profit on a slight intraday increase against its American counterpart. While the Federal Reserve is anticipated to maintain higher interest rates for an extended period because of sticky inflation, the Bank of Japan signaled that it is not in a rush to normalize policy.

This further implies that the widening US-Japanese interest rate differential will persist for some time, which, along with a generally favorable risk tone, prevents the safe-haven JPY

Both the Vietnamese dong and the Indian rupee are at an all-time low. The Central Bank of Indonesia is considering intervening as the rupiah is at its lowest point in four years, even though this is far more typical in emerging countries. Onshore and offshore, traders are also keeping an eye on China’s yuan, which has appreciated significantly less than its rivals. Chinese exporters would benefit from a weak yuan, but it might also stimulate capital flight.

The euro battered by the greenback

Global rate-cut timeframes have generally been reprimed because of a reconsideration of Fed policy easing, but expectations remain that the European Central Bank (ECB) and the Bank of England (BoE) will begin cutting rates by the middle of this year.

The euro remained mostly unchanged at $1.0661, heading for its largest monthly decline versus the dollar since January, while the sterling fell 0.1% to $1.2352.

Fundamentals changing

Investors who started the year believing the US dollar would weaken have been forced to reconsider due to the country’s booming economy and persistent inflation, which have prompted the Federal Reserve to postpone interest rate cuts.

The International Monetary Fund (IMF) predicts that domestic output will increase at a rate twice as fast as that of its Group-of-Seven counterparts, which is adding to the dollar’s appeal. Talk of “US exceptionalism” is rampant and bolstering bond yields and stocks. And the currency continues to be the ultimate haven in an era of escalating international unrest.

The comeback of the greenback has coincided with numerous indications that the US economy has escaped the decline that many had predicted. The US job market is still strong, and the manufacturing sector is growing, according to data on retail spending released earlier this month.

The most recent data on retail spending indicated that Americans are still opening their wallets. Because of the consequent persistence of inflation, Fed Chair Jerome Powell and other policymakers have delayed rate cuts longer than anticipated.

John Williams, President of the New York Fed, has said that rate increases might resume if necessary.

by Olumide Adesina

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