Mighty dollar creates stronger headaches for global policymakers

When it comes to the dollar, there is seems to be no viable alternative.
The greenback has an overarching and enduring sway over the financial world with the central role US banks and currency play in the global economy.
The dollar has gained against virtually every major peer in 2024, defying many on Wall Street who came into the year predicting a dollar selloff.
A resurgent US dollar is exasperating central bankers and governments around the world, forcing them into action to relieve the pressure on their own currencies.
Policymakers are stepping in to defend exchange rates with both words and deeds as a resilient American economy conspires to keep the greenback strong by pushing back expectations for lower US interest rates.
Just months ago, a recession in the US seemed all but inevitable.
Instead, data show the nation benefiting from a tight labour market, upbeat consumer mood and government subsidies for manufacturing, prompting investors to rapidly reassess their expectations for interest-rate cuts by the Federal Reserve.
Traders are now pricing under three quarter-point cuts in 2024, down from wagers for over 150 basis points of easing at the start of the year, helping lift a Bloomberg gauge of the dollar more than 2% this year — and pummeling everything from the Indian rupee to the Nigerian naira, to record lows.
The greenback remains up against 28 of its 31 major peers this year.
“This is a story of pure US exceptionalism,” said Stephen Miller, a four-decade markets veteran and consultant at Grant Samuel Funds Management in Sydney. “Buying the dollar remains the number one trade.”
As the US dollar continues to hold up stronger, the yuan and yen will remain in the spotlight. Excessive moves will keep the authorities vigilant, but with messaging to limit currency weakness, volatility will likely stay subdued, according Mary Nicola, a Bloomberg strategist.
That has the world’s central banks playing defence.
Japan last week warned of “bold action” to bolster the yen, which remains on the cusp of 152 per dollar — a level that many traders view as a line in the sand.
And with China’s yuan at the bottom of its permitted trading band against the dollar, investors are on watch for more forceful pushback, following tweaks to the currency’s daily reference rate.
Exchange rates matter because depreciating currencies increase the cost of imported goods, stoking inflation as those expenses feed through to prices in grocery stores and factories.
Meanwhile, there’s a higher likelihood that money will pour out of a nation with a weak currency in search of higher yields elsewhere — so-called capital flight — harming domestic investment and growth.
Meanwhile, talk of the euro touching parity with the dollar is returning as policymakers at the European Central Bank look primed to deliver more interest-rate cuts this year than their US peers.
JPMorgan strategists see the euro weakening to $1.05 by the middle of the year, from around $1.0850 currently, and the firm’s index of the broader dollar gaining slightly by June before slipping lower into year-end.
For sure, dollar dominance also has its side effects. In the US, a stronger greenback can drag on corporate profits by weighing on sales abroad.
For other nations, a highly valued greenback is more than just a headache. It raises the costs of imports, boosts inflationary pressures, and can back monetary policymakers into a corner, necessitating higher interest rates in order to stem capital flight.
Investors are also buying into that new reality, adding to bets on dollar strength in recent weeks. A gauge of non-commercial trader positions — a group that includes asset managers as well as hedge funds and other speculative market players — is now the most long since 2022, data from the Commodity Futures Trading Commission through March 26 show.