NEW YORK, Oct. 1 (Reuters) – The dollar’s sharp rally is accelerating, fueled by a hawkish Federal Reserve trend, rising Treasury yields and concerns over the possibility of a long battle to raise the cap of US debt.
The greenback is up 4.7% year-to-date and is near its highest level in a year against a basket of currencies. Net bets on the dollar in futures markets are at their highest for more than 18 months, according to CFTC data.
Because the dollar is the dominant currency in the world, its trajectory can have far-reaching implications for everyone from businesses to global central banks.
While a strong dollar can be a sign of economic strength, too rapid a currency rally can also affect the balance sheets of U.S. exporters by making their products less competitive abroad and making it more costly for multinationals to retrain. their funds in their national currency.
âThe movement of the US dollar that we are seeing right now is due to a confluence of factors that all line up to create the perfect storm,â said Simon Harvey, senior currency analyst at Monex Europe in London.
One of the main drivers of the dollar’s strength has been a more hawkish Fed, which said last week that it would start unwinding its $ 120 billion in monthly government bond purchases as early as November and potentially start. to raise rates in 2022, sooner than some investors had expected. Read more
Yields on 10-year US Treasuries, which exclude inflation, have risen around 37 basis points since early August, compared with a gain of just 5 basis points for its German counterpart. This has increased the attractiveness of dollar-denominated treasury bills relative to their foreign counterparts.
âIt seems the consensus that (the) Fed cut was in the dollar’s price was incorrect,â said Richard Benson, co-chief investment officer at Millennium Global in London. “We had a 20 to 30 basis point backup in yields that supported the dollar.”
A fierce fight to raise the US debt ceiling, which could lead to a US default if lawmakers don’t agree by October 18, also pushes the dollar up, a popular destination for nervous investors . Read more
So are concerns about the collapse of the heavily indebted China Evergrande group, which was once the country’s best-selling real estate developer, as well as concerns about rising inflation and potentially slower growth, has said Harvey, of Monex Europe. Read more
The S&P 500 (.SPX) fell 4.8% in September, its worst month since March of last year, while the dollar index rose 1.7%.
âThe bulk of these factors all point to a more stagflationary macroeconomic environment and thus lead markets to take refuge in the dollar,â Harvey said.
Many are also trying to assess the potential effects of a stronger dollar on corporate balance sheets.
Tech companies are among the most exposed to currency fluctuations, with more than 54% of total category revenue coming from overseas, an analysis of Russell 1000 companies by Bespoke Investment Group showed. Next comes the materials sector, of which nearly 46% of total turnover comes from abroad.
Matt Weller, Global Head of Research at Forex.com, noted that despite the recent rally in the dollar, it remains stable from last year’s levels and below what it was in previous years. .
âMost companies would start to worry about these risks if the dollar index started approaching the 100.00 level as we approach 2022,â he said. The index was around 94.25 Thursday night.
Some investors believe the strength of the dollar should not last. Analysts at Neuberger Berman said in a recent note that the dollar has entered a multi-year bearish cycle after peaking in March 2020 and will eventually fall.
Their forecasts are based on a confluence of factors, including projections of a decline in the United States’ proportional contribution to global gross domestic product from 2022, which the firm says coincided with the weak dollar. in the past.
Others, however, are betting that a Hawkish Fed will likely keep the US dollar high in the months to come.
The dollar could rise as much as 10% from current levels due to Fed tightening expectations, Societe Generale analysts said in a recent report.
Mazen Issa, senior currency strategist at TD Securities, expects rising real rates to continue to support the dollar, although he doesn’t think the currency has reached levels where it could pose a problem for companies. .
âThe US dollar has demonstrated its ability to weaken through key technical markers and it will be difficult to unwind that in the short term,â he said.
Reporting by Gertrude Chavez-Dreyfuss and Saqib Iqbal Ahmed in New York Writing and additional reporting by Ira Iosebashvili Editing by Matthew Lewis
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