US dollar rally still has legs amid toxic investing landscape

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. On both sides of the dollar’s strength equation, motives exist to continue the rally. One is betting on the continued weakness of its major peers, from the faltering European currencies to the weak Japanese Yen, as they suffer from their own problems. On the other hand, the Federal Reserve’s insistence on keep hiking rates and fear of recession will drive the demand for the dollar. The dollar has been staying strong against the world’s major currencies, near its biggest rally in nearly 40 years and the third largest since President Richard Nixon broke the dollar’s peg to gold more than half a century ago. Here are some underlying reasons: Whether during periods of out performance of the US economy or recession, the dollar stands to gain in all cases. If risks increase, people seek the strongest safe-haven, the dollar. And if the economic outlook for the US flourishes, the greenback feeds on the buoyancy.The Fed’s committed to raising interest rates until inflation returns to its 2% target, even if it will sacrifice some strength in the labour market and slowdown in the US economy.A widening rate gap between the hawkish Fed and other central banks tends to support a stronger dollar.The mighty dollar has pushed the euro to parity, the lowest level for the euro since 2002. The euro is seen unlikely to recover from its lows against the dollar until Europe emerges from the natural gas crisis sweeping the region.Despite Japan’s recent pickup in inflation, hopes for the yen recovery have faded. The Bank of Japan’s insistence on holding the ultra-easing policies will increase the yen’s weakness against the dollar.The Chinese currency has come under pressure after the central bank lowered a key policy rate this month to boost an economy battered by Covid restrictions. According to Bloomberg data and JPMorgan forecasts, the euro will fall the most against the dollar by the end of the year, as the single currency will drop to $0.95 by December.The dollar’s recent rally should soon cause global trade — and therefore demand for dollar-denominated assets — to decline, leading to a weaker US currency. Virtually all major commodities are traded in US dollar. A rising dollar could eventually depresses global trade as the price of everything rises in foreign-currency terms. The dollar’s strength has yet to peak, according to a majority of currency strategists polled by Reuters who were however divided on when the currency’s advance would come to an end.With the Fed expected to stay ahead of its peers in the tightening cycle by some measure, and the global economy expected to slow significantly, there is a path for the dollar to weaken meaningfully.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, lingering Covid scare in China, and of late, a hawkish Fed have all supported the dollar’s winning streak.The dollar’s dominant status as a global reserve currency means other countries also rely on its stability.