The greenback is at its highest level in two decades, climb another 1% on Thursday at just under 104 in the U.S. dollar index, marking its highest level since 2002. The gauge measures the strength of the U.S. currency against a basket of other developed world currencies, including the euro, the yen, the Canadian dollar and the pound sterling. In fact, the greenback has advanced 7% year-to-date, outpacing many assets from stocks and bonds to gold and bitcoin.
Remark: “It’s clearly a world where the US dollar is king,” said Mingze Wu, Singapore forex trader at StoneX Group. “The dollar will continue to strengthen globally as long as the rest of the world does not follow the corresponding interest rate hikes.” The greenback is also getting a safe haven offer with Treasuries amid concerns about economic growth and a possible recession.
Speaking of growth, GDP in the United States shrank for the first time since the pandemic, contracting by 1.4% in the first quarter (vs +1.1% consensus and +6.9% in Q4). The surprise was exacerbated by a growing trade deficit reflecting supply chain issues, as well as falling private investment in inventory and shrinking government stimulus spending. The Fed is still likely to raise rates by 50 basis points next week amid strong domestic demand, although Treasury Secretary Janet Yellen has warned new “significant negative shocks” that are “likely to continue to challenge the economy”.
Growth vs inflation: The strength of the dollar is also the result of weaker comparative currencies. The euro has been in retreat due to the war in Ukraine, China’s severe COVID restrictions have led to a weaker yuan, and Japan’s enlargement policy and trade gap have dragged the yen down this year. “We’ve had two decades of the benefits of low inflation, but now central banks are trying to regain their inflation-fighting credibility,” noted Jordan Rochester, currency strategist at Nomura. “But the ECB is facing stagflation and will struggle to stay with the Fed, and the BOJ isn’t even coming to the party. With lower exposure to China and lower exposure to Ukraine, states States stand out as resilient.”
Associated ETFs: NYSEARCA:UUP, NYSEARCA:UDN, NYSEARC: USDU