(Bloomberg) — The resurgence of the U.S. dollar is infuriating central bankers and governments around the world, forcing them to act to relieve pressure on their own currencies.
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From Tokyo to Istanbul, policymakers are stepping up to defend exchange rates with word and deed, as a resilient U.S. economy conspires to keep the greenback strong by fending off expectations that U.S. interest rates will fall.
The greenback has gained against virtually all of its major peers in 2024, defying many on Wall Street who predicted a massive sell-off in the dollar earlier this year. That prompted Japan to issue increasing warnings about its willingness to intervene to prop up the yen from its 34-year low. Turkey took markets by surprise with a rate hike to boost the lira, China and Indonesia moved to stabilize their currencies, while Sweden and India are also under pressure.
These intensified efforts are reminiscent of 2022, when Swiss and Canadian officials lamented the weakening of their exchange rates amid rising inflation and a strong dollar tearing apart emerging economies, contributing to Sri Lanka's historic default . Today, countries burdened by foreign debt remain at risk, with the Maldives and Bolivia particularly vulnerable if dollar strength persists.
“The US dollar continues to put pressure on other central banks,” said Helen Given, a foreign exchange trader at Monex. “Given the current global environment in which central banks appear to be seeking to end their tightening cycles, there appears to be no sure way out of the dollar's continued dominance.”
Just a few months ago, a recession in the United States seemed almost inevitable. Instead, data shows the country is benefiting from a tight labor market, upbeat consumer sentiment and government subsidies to the manufacturing sector, prompting investors to quickly reassess their expectations for falling prices. interest rate by the Federal Reserve.
Traders now expect cuts of less than three-quarters of a point in 2024, down from bets of more than 150 basis points of easing at the start of the year, which helped lift the Bloomberg dollar gauge by more than 2% this year – and crushing everything from the Indian rupee to the Nigerian naira, both of which fell to record lows. Even though the U.S. currency has heated up somewhat in recent days, the greenback remains up against 28 of its 31 major peers this year.
“This is a story of pure American exceptionalism,” said Stephen Miller, a four-decade markets veteran and consultant at Grant Samuel Funds Management Pty in Sydney. “Buying the dollar remains the number one trade.”
What Bloomberg strategists say…
While the US dollar continues to hold up relatively well, the yuan and yen will remain in the spotlight. Excessive measures will keep authorities vigilant, but with messages aimed at limiting currency weakness, volatility will likely remain subdued.
Mary Nicola, Markets Live strategist
This causes the world's central banks to play a defensive role.
Japan warned last week against “bold action” to support the yen, which remains around 152 to the dollar – a level many traders see as a line in the sand. Indonesia has intervened several times in the interbank, futures and bond markets to raise its rupiah. And with the Chinese yuan at the lowest of its permitted trading margin against the dollar, investors are expecting a stronger reaction following adjustments to the currency's daily reference rate. The yuan held back other Asian currencies, notably the Indian rupee.
Other countries are turning to monetary policy to support their currencies. Turkey unexpectedly raised interest rates last month, while Swedish officials said a weaker crown could delay its first easing measure.
“A challenge for the Riksbank's monetary policy is that US monetary policy appears to have recently had a particularly large impact on the Swedish exchange rate,” Deputy Governor Martin Floden said according to the minutes of the decision on the March rate published Thursday. If the currency continues to weaken, “monetary policy may need to remain restrictive for longer,” he said.
Exchange rates are important because depreciating currencies increase the cost of imported goods, fueling inflation as these expenses are reflected in prices at grocery stores and factories. At the same time, it is more likely that money will escape from a country with a weak currency in search of higher returns elsewhere – known as capital flight – which will harm investment and national growth.
The irony, of course, is that unilateral intervention in foreign exchange markets – where $7.5 trillion changes hands every day – can only temporarily change the exchange rate.
“They are trying to buy time,” Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA, said of central banks and government intervention in foreign exchange markets. “If we start to have more doubts about Fed rate cuts, then there is no point in intervening: volatility will increase and the intention will no longer make sense.”
Although markets still expect the Fed to ease policy this year, not everyone is even convinced that this will bring relief to foreign exchange markets.
Central banks are about to embark on their most synchronized rate cut cycle since 2008, and such a scenario bodes well for the dollar, as the US policy rate is expected to remain one of the highest among major developed economies.
“Beyond intervention, we will see, and we are already seeing, a willingness to get ahead of the Fed in terms of easing,” said Carmen Reinhart, a Harvard Kennedy School professor and former World Bank chief economist. . “I think they'll be more timid about doing it if they're worried about the currency.”
With all the concerns from global policymakers, “we're seeing central banks recognize that the Fed's cuts aren't necessarily going to provide relief, at least on the currency side,” said Michael Cahill, a foreign exchange analyst at Goldman. Sachs Group Inc.
Investors are also embracing this new reality, stepping up their bets on dollar strength in recent weeks. A gauge of the positions of non-commercial traders – a group that includes asset managers as well as hedge funds and other speculative market participants – is now the longest since 2022, according to Commodity Futures Trading Commission data through 'to March 26.
For Ed Al-Hussainy, all this is a sign that the strong greenback is here to stay.
“There is only one developed currency trade to rule them all,” said the rates strategist at Columbia Threadneedle Investment. “Long dollar.”
–With help from Tania Chen, Selcuk Gokoluk, Greg Ritchie and Aline Oyamada.
(Adds dollar retracement to seventh paragraph.)
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