While rising U.S. Treasury yields have been a key catalyst for the dollar's rally, other factors have also played a role in driving the dollar higher.
NEW YORK: The breathtaking surge in the US dollar has crushed foreign currencies, decimated corporate profits and given investors one of the few winning trades of the year. The dollar has been on a downward trend in recent weeks. recession Concerns may continue to rise in 2023.
Dollar at September high speed Rising interest rates helped boost the dollar.
While rising U.S. Treasury yields were a key catalyst for the dollar's rise, other factors also played a role in the dollar's rise. Investors have flocked to the dollar, a popular destination in times of uncertainty, to avoid market volatility triggered by surging global inflation, soaring energy prices and Russia's invasion of Ukraine.
Also boosting the dollar's appeal has been the relative strength of the U.S. economy at a time when fears of an energy crisis have hit European assets and strict COVID-19 controls have hampered growth in China.
Even after paring back some of the dollar's gains, we're still on track for our best year since 2014. Fund managers surveyed by BoFA Global Research ranked the dollar as the most crowded trade on the market for the fifth straight month in November, with a record number of survey participants saying: The currency is overvalued.
Nonetheless, a Reuters poll of 66 foreign exchange strategists suggests the dollar will trade at current levels in about a year, with many predicting that tightening policies by global central banks will hamper growth and renew the greenback's safe-haven appeal. We expect it to increase.
Why is it important?
Getting the dollar right is key for investors because its trajectory dictates everything from corporate earnings to the prices of commodities like oil and gold.
A stronger dollar makes the products of U.S. exporters uncompetitive overseas and hurts U.S. multinationals that must exchange their earnings for dollars. The S&P 500's foreign exposure is about 30%, with the technology and materials sectors being the weakest, according to Bank of America.
Nike, IBM and Meta Platforms are among a variety of companies that have warned of a hit from the dollar's strength this year. The stronger dollar has reduced S&P returns by about 8% in 2022, according to Tom Lee, head of research at Fundstrat Global Advisors.
For the rest of the world, a stronger U.S. currency makes oil and other dollar-denominated goods more expensive for foreign buyers, while also making them more expensive for foreign companies and governments that borrow dollars to provide services. debt.
A stronger dollar lowers U.S. consumer prices while also depressing other countries' currencies, helping to worsen global inflation. The International Monetary Fund (IMF) estimated in October that on average, a 10% increase in the value of the dollar would be reflected in inflation of 1%.
What does 2023 mean?
There are signs that Wall Street's sentiment toward the dollar is changing. The dollar fell 5% against a basket of currencies last month, the biggest monthly decline since 2010, according to data showing consumer prices fell less than expected in October.
Speculative traders in futures markets moved into net short positions against the U.S. dollar in November for the first time in 16 months, according to Reuters calculations based on U.S. Commodity Futures Trading Commission data.
Whether the dollar's decline continues will ultimately depend on the Fed's ability to curb inflation enough to ease monetary policy. Another mild inflation reading in US data due next week could strengthen the chances of a dollar decline.
Investors are also waiting until the end of the Federal Reserve's monetary policy meeting on December 14. At this meeting, the central bank is widely expected to slow the pace of interest rate hikes by 50 basis points.
In the long term, economic concerns may increase as the dollar moves. About 80% of strategists surveyed by Reuters said they see little upside for the dollar given monetary policy.