‘Perfect storm’ drives dollar up in volatile markets By Reuters
© Reuters. FILE PHOTO: A photo illustration shows US $ 100 banknotes taken in Tokyo on August 2, 2011. REUTERS / Yuriko Nakao / File Photo
By Gertrude Chavez-Dreyfuss and Saqib Iqbal Ahmed
NEW YORK (Reuters) – A crushing dollar rally gathers pace, fueled by a hawkish Federal Reserve tilt, rising Treasury yields and concerns about the possibility of a protracted battle to raise the cap on US debt https: / /www.reuters.com/business/finance/wall-street-nervous-about-washington-debt-ceiling-warnings-sound-2021-09-29.
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 rise in the currency can also affect the balance sheets of U.S. exporters by making their products less competitive abroad and making it more expensive for multinationals to retrain. their funds in their national currency.
“The 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,” said Simon Harvey, senior currency analyst at Monex Europe in London.
A key factor in the dollar’s strength has been a more hawkish Fed https://www.reuters.com/business/finance/fed-likely-open-bond-buying-taper-door-hedge-outlook-2021-09- 22, which announced last week that it would start unwinding its $ 120 billion monthly government bond purchases as early as November and potentially start raising rates in 2022, sooner than some investors had. planned.
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.
“It seems the consensus that (the) Fed cut was in the dollar’s price was incorrect,” 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 bitter fight to raise the US debt ceiling https://www.reuters.com/breakingviews/us-physical-divisions-crash-into-debt-ceiling-2021-09-28, which could lead to default of The United States if lawmakers don’t agree by Oct. 18, also pushes up the dollar, a popular destination for nervous investors.
The same goes for the collapse of the heavily indebted Chinese group Evergrande https://www.reuters.com/business/investors-grappling-with-evergrande-fallout-weigh-risk-wider-pain-2021-09- 20, once the country’s best-selling real estate developer, along with concerns about rising inflation and potentially slower growth, said Harvey, of Monex Europe.
The index fell 4.8% in September, its worst month since March of last year, while the index rose 1.7%.
“The bulk of these factors all point to a more stagflationary macroeconomic environment and thus lead markets to take refuge in the dollar,” 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, where 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. .
“Most companies would start to worry about these risks if the dollar index started approaching the 100.00 level as we approach 2022,” 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 on Fed tightening expectations, Societe Generale (OTC 🙂 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. .
“The US dollar has demonstrated its ability to weaken through key technical markers and it will be difficult to unwind that in the short term,” he said.