The appreciation of the U.S. dollar, supported by a strong economy, persistently high inflation and geopolitical tensions, has unnerved monetary strategists from Tokyo to Beijing to Stockholm – the dollar king’s most disenfranchised subjects. The greenback is trading at its highest since November 2023 against other major currencies, with a strong chance for a fourth consecutive winning month.
The latest dollar rout, which followed stronger-than-expected March inflation readings across the Atlantic, dampened hopes for more Federal Reserve rate cuts and raised the stakes even for another rate hike, showing how sensitive currency markets are to interest rate changes.
Dollar strength is a global problem, but some parts of the planet are under particular pressure.
Japan and South Korea
One US dollar is just below 155 Japanese yen, its highest price since the 1990s, and Tokyo has warned it could launch unilateral interventions to protect the national currency. Even after Japan finally managed to end years of negative interest rate policy in March, the gap between Japanese and U.S. interest rates remains wide open and is likely to remain so for some time. And that means a weak yen. The Japanese currency is the biggest loser among its G10 peers this year.
The US dollar has gained about 7% against the South Korean won in March alone, its strongest in a year.
Last week, the United States, Japan and South Korea agreed to “close consultations” on currency markets – a rare warning to market players. Morgan Stanley’s head of foreign exchange trading and emerging market strategies, James Lord, explains that “statements like this suggest that if Japan’s finance ministry or a similar agency in South Korea wants to take action to curb volatility on exchange rates, then Washington will not object.”
China and developing Asia
Dollar strength is causing serious headaches in Asia.
The Indian rupee and the Vietnamese dong are at their lowest levels in history. Indonesia’s rupiah is the cheapest it has been in four years and the country’s central bankers are already talking about intervention, a common occurrence in the developing world.
Traders are also keeping a close eye on mainland and overseas quotes for the Chinese yuan, which has nevertheless depreciated far more sparingly than its Asian rivals. China’s weak money is helping the country’s export companies, but it is also encouraging capital outflows. “The offshore yuan is definitely at the top of the list” when it comes to Asian currencies under pressure, say Bank of America experts. And they add that “this is one of the most popular ways to create short positions because the rate does not move.”
The Eurozone
The euro traded above $1.06. dollar last week, and as of the evening hours of April 23, it has approached $1.07 and is by no means among the weakest major international currencies against the greenback. However, banking analysts have started to lower their forecasts for the currency ratio.
Before the release of the latest inflation data for the United States, market players predicted that the European Central Bank and the Federal Reserve would make simultaneous interest rate cuts. However, now the expectations are that the ECB will lower interest rates in June, and its American counterparts – in September at the earliest, which has brought the euro down to the lowest quotations in five months.
According to Société Générale’s currency strategists, if the euro continues to weaken and falls below $1.05. dollar and crude oil prices rise, there will be an inflationary spiral and the ECB should be very cautious after the first rate cut.
Sweden
The import of inflation through weaker currencies is a serious problem for small economies. Price indices in Sweden are falling, which provokes expectations that the Riksbank will lower interest rates in May. However, the institution’s deputy chairman, Per Jansson, fears that further weakness in the national currency could create problems for the inflation outlook.
The Swedish krona has lost about 8% of its market valuation against the greenback since the start of the year and could weaken to 11.14 per $1. dollar in the next six months, predicts “Goldman Sachs”. In the morning hours of April 24, the quote was 10.8455 Swiss francs. crowns for one US dollar.
“The configuration of higher interest rates for a longer time in the United States creates problems for the Riksbank”, commented currency strategists at UBS. Because “with the loosening of monetary conditions in Sweden, in the short term, the interest rate differential (between the two currencies) will widen, which has a negative effect on the krona”.
Switzerland
A strong dollar is not bad news for everyone.
The Swiss franc has depreciated 7.5% against the US currency since the start of the year, largely due to a surprise rate cut by the Swiss National Bank (SNB) in March. Unlike most of its peers, however, the SNB is worried about a strong national currency as local exporters struggle to remain competitive.
UBS predicts that the US dollar will strengthen to 0.952 Swiss francs. francs by the end of the year from the current 0.9143 francs.
