As investors run to safety amid a toxic investing landscape, the mighty dollar is ruling global markets.
Slowing global growth, persistent inflation, the war in Ukraine, more Covid lockdowns in China, and of late, monetary tightening by US Federal Reserve have all combined to bring about an unprecedented selloff that wiped off an estimated $9tn from US equity markets this year.
The greenback has crossed twenty-year highs as risk-off sentiments stemming in part from concerns over the Federal Reserve’s ability to combat high inflation enhances the currency’s appeal.
The dollar has risen for five straight weeks as US Treasury yields have climbed on expectations the Fed will be aggressive in attempting to tamp down inflation.
The US central bank last week raised rates by 50 basis points as it seeks to lower inflation without tilting the economy into a recession.
Market positioning data shows the dollar is drawing in more adherents, according to Bloomberg.
Hedge funds boosted long bets to the highest this year, according to data from the Commodity Futures Trading Commission.
“It doesn’t look like this trend will turn any time soon,” says Chris Turner, head of currency strategy at ING Groep NV. “You’ve got the Fed, you’ve got the renmimbi and you’ve got Europe, and it’s hard to bet on any of those issues changing in the near term.”
Resultantly, many of the dollar’s global counterparts are falling to levels that haven’t been seen in years. On Monday, the pound slid to a fresh 2020 low, the yen dropped to the weakest since 2002, while India’s rupee slumped to a record low.
Many of the concerns about slowing global growth are being driven by China.
China’s weak export reading comes on the heels of a report last week showing manufacturing activity plunged to its worst level since February 2020.
Developing-nation currencies are also being pummelled due to the threat of funds being pulled from their stock and bond markets as US yields rise.
As for Europe, foreign-exchange traders are set to bludgeon the euro anew as the war in Ukraine and the supply-chain crisis ramp up stagflation risk — driving the single currency to parity versus the dollar for the first time in nearly two decades.
In the view of 60% of respondents to the latest MLIV Pulse survey, the euro will eventually end up level with the greenback, with a small majority of more than 400 participants betting it will then recover to $1.15.
With the common-currency bloc’s proximity to the Russia-Ukraine conflict and dependence on cross-border trade, Europe is at the epicentre of global concern over rising prices and slowing economic growth.
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.
The dollar’s dominant status as a global reserve currency means other countries also rely on its stability.