As investors hold back on buying riskier assets amid enduring uncertainty, the dollar’s blazing rally seems to have added strong legs.
The Bloomberg Dollar Index is holding near the 2021 high it reached in March.
The currency rallied 2.3% in June, its biggest monthly gain since March 2020 – when the pandemic panic first shook risk assets – outperforming the British pound and euro, as well as traditional havens like the Japanese yen and Swiss franc.
Going forward, it’s all about the Federal Reserve for the greenback.
After the FOMC (Federal Open Market Committee) meeting in June, officials expected rate hikes to come far sooner than the market anticipated, potentially as early as 2022.
The dollar’s staying power comes down to what the Fed says and does from here. Frequent appearances from the central bank’s members last month gave it a push, especially as taper talk accelerated.
The dollar “looks to have more room to run to the upside,” according to Michael Brown, senior market analyst at London’s Caxton FX.
Searching for safety, investors are reconsidering their exposure to higher-yielding EM currencies as emerging market nations are lagging in reopening time lines amid slower vaccination rates.
From a financial perspective, America’s hegemony is fortified not by its military might, but its currency.
The US has historically maintained a strong dollar policy. And the greenback has an overarching sway over the financial world.
The US currency is on one side of almost 90% of foreign-exchange transactions and accounts for two-thirds of international debt.
Virtually all international trades in oil are priced in dollars.
Already the world’s reserve currency, the dollar’s hold over the world of foreign exchange has grown even stronger during the Covid-19 pandemic.
When the markets are teetering, investors view the US currency as the safest haven, even more so than gold, the yen or the Swiss franc.
As the grim economic implications of the virus outbreak strain markets across the world, demand for the dollar has soared, pushing other currencies lower.
It’s, indeed, hard to dethrone the mighty dollar.
Any move away from the greenback involves bother and expense. Shifting to the euro, yuan or rouble means higher costs and difficulty finding banks to handle business.
Under former President Donald Trump’s “America First” manifesto, the so-called strong dollar policy was shoved aside, as gains in the currency crimped US exports and hurt the earnings of America’s multinational companies.
But Treasury Secretary Janet Yellen signalled earlier this that she’d return stability and predictability to the $6.6tn-a-day currency market.
The dollar’s dominant status as a global reserve currency means other countries also rely on its stability.
In a nod to the 2020 pandemic trade, investors are buying Treasuries, tech stocks and the dollar, signalling defensive positioning.
Taking a longer view, the greenback is up 2.5% since June 1. That’s in stark contrast to the dollar index’s average monthly decline of 0.3% since the market crashed last year.
There’s also a bullish scenario for the dollar if the Fed raises rates or signals that it plans to. It would add to the demand for the greenback relative to other global assets with US investors selling bonds.
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