Money world: Strong performance of the US dollar has stirred the spirits of the markets – Finance

Global financial markets are facing a force they didn’t expect to face in 2024 – the strong dollar is back and looks set to hold its ground for some time.

After predicting at the start of the year that the greenback would head lower, investors were forced to rethink their forecasts as a strong U.S. economy and sticky inflation required the Federal Reserve to hold off on interest rate cuts, Bloomberg reported.

With the International Monetary Fund forecasting that US gross domestic product will grow at twice the rate of the other G7 countries, talk of “US exceptionalism” is becoming more common, while the performance of stocks and bonds contribute to the attractiveness of the dollar. And in a period of rising geopolitical tensions, the currency is still seen as the ultimate currency safe haven.

Bloomberg’s dollar index is up more than 4% this year, reflecting gains against all major developed and emerging markets.

Among those retooling their dollar strategies is the world’s second-largest money manager, Vanguard Group Inc., which is now talking about the greenback’s sustained strength. UBS Asset Management, on the other hand, indicates that the dollar is likely to continue its upward trend, although it is 20% more expensive than generally estimated. Meanwhile, the Wells Fargo Investment Institute capitulated on forecasts of dollar weakness through the end of the year and now sees the greenback extending its climb into 2025.

“If other countries can’t keep up with US growth and inflation, there’s simply no other option but to buy dollars,” said Ales Kutny, of Vanguard.

The greenback’s rise came amid a number of signs that the US economy had avoided the slowdown many expected. The labor market remains tight and manufacturing activity continues to expand. The resulting persistent inflation has led Fed Chairman Jerome Powell and other central bankers to take the position that they should wait longer before starting to cut rates.

New York Federal Reserve Governor John Williams even suggested the possibility of resuming interest rate hikes if needed.

“At the start of the year I was more bearish (expecting a fall) on the dollar, but that’s no longer the case,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA. “Powell’s comments definitely made a difference.”

Of course, the appreciation of the world’s reserve currency hurts America’s partners and their economies. India and Nigeria were among countries whose exchange rates fell to record lows, while from Japan to Poland there was talk of foreign exchange intervention.

Central banks in developed markets such as Australia, the eurozone and the UK may find that the scope for rate cuts is limited if weaker exchange rates boost domestic inflation. Countries burdened with external debt, including the Maldives and Bolivia, as well as those heavily dependent on US imports, may be among the hardest hit.

In a sign of growing anxiety caused by the greenback’s rapid rise, earlier this month G7 countries reiterated their common stance on the potential damage from erratic currency movements. It came after US Treasury Secretary Janet Yellen noted Japan and South Korea’s concerns about their currencies falling sharply, which could offer Tokyo and Seoul more room to defend the yen and won.

High yield

As markets reduce bets on the Federal Reserve easing monetary policy, Treasury yields have jumped again in recent weeks. The rise was a major driver of the dollar’s appeal, which also benefited from continued inflows in US stocks amid enthusiasm around artificial intelligence.

“What’s unique now is that the dollar has such a high yield,” said Peter Vassallo, portfolio manager at BNP Paribas Asset Management.

In contrast to reduced expectations for Fed easing, European Central Bank President Christine Lagarde said central bankers may be in a position to cut interest rates in June. Japan, meanwhile, is so far behind the US in growth that even a historic decision to end the world’s last negative interest rates failed to prevent the yen from hitting a 34-year low.

“The interest rate environment in the U.S. is much more attractive,” said Ed Al-Hussaini, global interest rate strategist at Columbia Threadneedle Investments. “The US dollar offers a very high rate of return.”

Seeking asylum

Another headwind for the dollar is its role as an unrivaled safe haven for investors seeking safe assets during political or financial turmoil. The currency’s safe haven status was made clear on Friday as the greenback rallied after Israel retaliated against Iran less than a week after Tehran’s drone and missile attack.

The dollar’s status as a safe haven can be well explained by the widespread theory of the “dollar smile” introduced by Stephen Jenn, CEO of Eurizon SLJ Capital Ltd. Jenn’s thesis is that the dollar rises when the US economy is booming or in deep recession, but registers weakness during periods of moderate growth.

Elevated geopolitical risks are working together with a booming economy to create “a curlier smile, with steeper tails,” creating more of a U-shape, Jenn said in an interview. “For any level of US superiority, the dollar should be stronger because of this safe haven premium coming from geopolitical risk,” he added.