Zhitong Finance APP has learned that the global financial market will encounter an unexpected headwind in 2024: the strong US dollar is making a comeback, and it seems that it will continue.
At the beginning of this year, investors predicted that the dollar would fall, but investors were forced to rethink as the U.S. economy overheated and inflation remained high, forcing the Federal Reserve to postpone an interest rate cut.
The International Monetary Fund (IMF) predicts that domestic output in the United States will grow twice as fast as other members of the Group of Seven (G7), and the narrative of “American exceptionalism” prevails and supports U.S. stocks and bond yields. Increases the attractiveness of the dollar. In an era of increasing geopolitical conflict, the U.S. dollar remains the ultimate currency haven.
The Bloomberg Dollar Index is up more than 4% this year, reflecting the greenback’s gains against all major developed and emerging market currencies. A popular gauge of trader sentiment pointed bearish at the start of the year, but bullish dollar bets have since surged to the highest level since 2019, according to the U.S. Commodity Futures Trading Commission.
Bullish dollar bets surge to highest level since 2019
Vanguard Group, the world’s second-largest fund manager, is also adjusting its U.S. dollar strategy and now calls for continued U.S. dollar strength. UBS Asset Management believes that although the dollar is 20% higher than its usual valuation, it may appreciate further. Meanwhile, Wells Fargo Investment Institute dropped its forecast for dollar weakness by year-end and now sees gains extending into 2025.
“If other countries can’t catch up to U.S. levels of growth and inflation, they will have no choice but to buy dollars,” said Ales Koutny, head of international currencies at Vanguard Group. “What used to be a very tactical trade for us is now It becomes more of a long-term structural view of continued strength in the dollar and the U.S. economy.”
The dollar’s recovery comes amid a flurry of signs that the U.S. economy is emerging from the slowdown many expected. The U.S. labor market remains tight and manufacturing activity continues to expand. Persistent inflation has left Federal Reserve Chairman Jerome Powell and other policymakers waiting longer than expected to cut interest rates.
New York Fed President John Williams even hinted that he might resume raising interest rates if necessary.
“I was more bearish on the dollar at the beginning of the year, but that’s no longer the case,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA. “Powell’s comments definitely changed things.”
The dollar’s surge has taken a toll on other currencies and the economy, and traders are scrambling to respond. Countries including India and Nigeria have seen their currencies slide to record lows, while officials from Japan to Poland have warned of intervention in currency markets.
Earlier this month, the G7 reiterated their joint stance on the potential damage of disorderly currency swings, a sign of growing anxiety over a rapidly rising dollar. Earlier, U.S. Treasury Secretary Janet Yellen acknowledged Japan and South Korea’s concerns about a sharp depreciation of their currencies, which could give Tokyo and Seoul more room to defend the yen and South Korean won.
high yield
U.S. Treasury yields have surged again in recent weeks, with the benchmark yield rising to nearly 5% as markets scale back bets on easing policy from the Federal Reserve. The surge in yields is a major driver of the dollar’s appeal. In addition, the U.S. dollar has also benefited from the continued flow of funds into U.S. stocks amid the artificial intelligence boom.
“What’s unique right now is that yields on the dollar are so high,” said Peter Vassallo, portfolio manager at BNP Paribas Asset Management. “If you’re a global allocator and you’re managing your own portfolio, here’s how easy it is to improve your risk-adjusted returns: Buy unhedged short-term U.S. Treasuries.”
European Central Bank President Christine Lagarde hinted that policymakers may cut interest rates in June, while expectations for the Fed’s easing policy have been reduced. Meanwhile, Japan lags so far behind the United States in economic growth that a historic decision to end negative interest rates failed to prevent the yen from falling to a 34-year low.
“The interest rate environment in the U.S. is much more attractive,” said Ed Al-Hussainy, global rates strategist at Columbia Threadneedle Investments. “The dollar returns are very high.”
Hedging demand
Another factor working in the U.S. dollar’s favor is that it serves as a safe haven for investors seeking refuge during times of political or financial turmoil. The dollar’s safe-haven status was fully demonstrated last Friday after Israel launched a retaliatory strike against Iran.
“As long as the U.S. economy is stronger than the rest of the G7, the dollar will strengthen relative to other G7 currencies,” said Barry Eichengreen, an economist at the University of California, Berkeley. “Not everyone is happy about it, but there’s nothing that can be done about it. “
But according to some observers, including Clocktower Group’s Marko Papic, a stronger dollar could provide “a glimmer of hope” for Europe, China and Japan. “Given that much of the rest of the world is export-led, this will help drive a global economic recovery,” said the alternative asset manager’s chief strategist.
While rising tensions in the Middle East have provided the dollar with a fresh boost, its strength is likely to persist long after the conflict ends.
Commenting on the latest developments in the Middle East, Commonwealth Bank of Australia strategist Carol Kong said, “I still expect the U.S. dollar to be the ultimate winner as the knee-jerk reaction subsides.” “U.S. energy independence and high yields are likely to keep the dollar attractiveness to investors.”
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