/Pogled.info/ The US currency shows strengthening miracles against a basket of world currencies. The euro, the Japanese yen and the British pound, on the other hand, all fell to multi-year lows. This is a side effect of the Federal Reserve’s interest rate hike. Why is such a strong US dollar dangerous and who will it hit?
The ICE Dollar Index rose more than 14% in 2022, the most impressive increase since 1985. The euro, Japanese yen and British pound fell to multi-year lows against the dollar. Emerging market currencies were also affected, with the Egyptian pound down 18%, the Hungarian forint down 20% and the South African rand down 9.4%, according to the Wall Street Journal.
On Wednesday, economists expect the Federal Reserve to raise the interest rate again by 0.75 percentage points, to 3.00-3.25%, against which the dollar could strengthen further.
“The strong dollar is a side effect of the Federal Reserve’s interest rate hike. Therefore, the US regulator is fighting inflation, having no other options for it. If all leading countries did the same at the same time, the dollar would stand still. But since the US is raising its rate faster than all other countries included in the index’s group of currencies, mainly Europe plus Japan, a temporary imbalance in favor of the dollar has arisen, “explains Valery Emelyanov, an equities expert. market.
The second reason is the risks of starting a global recession and the dollar, whatever they say, is still a safe haven. “The risks of recession are increasing in Europe, inflation is reaching multi-year highs”. Against this backdrop, capital outflows from the European equity market began in the spring of this year. The same is happening in Asia, where the locomotive of the entire economy of the Asia-Pacific region – China – constantly announces lockdowns for covid outbreaks, where threats of military confrontation with the US over Taiwan are growing and GDP shows minimal growth. , threatening the world’s second-largest economy with bankruptcy, ”says Artyom Deev, head of the analysis department at Amarkets.
“For many, the dollar remains a model of” safe haven “, in which to invest in which it is possible to wait for the end of the crisis and the devaluation of one’s own national currency. “There were a few. But the case of the freezing of half of the gold and currency reserves of the Central Bank of the Russian Federation in almost all Western countries has considerably undermined confidence in the euro, the Swiss franc and the British pound. , the dollar is also toxic, but of all other toxic currencies it is the most reliable in terms of hedging market risks, “says Natalia Milchakova, a leading analyst at Freedom Finance.
“Investors believe anything can happen, but the US will hold up and the dollar won’t collapse.” An illusory stance in this situation, but it still helps investors and the US, ”adds Deev.
After all, investing in US Treasuries is really profitable because their yields rise along with the Federal Reserve’s interest rate hikes.
“The 10-year US Treasury bond is now paying more than 3.5% per annum, or 35-40% for its entire term, which hasn’t happened for nearly 15 years. All major investors – funds, investment banks – actively shifting to US debt, selling bonds and stocks from other countries. In terms of risk / return, there is nothing better in the world right now. Hence the noise around the dollar and the lack of interest in other currencies and assets, “says Emelyanov.
For the US itself, the strong dollar is both an asset and a problem. On the one hand, the US will get cheaper and higher imports, which is a boon for some industries and for ordinary Americans, an increase in the return on deposits and pension funds, which is good for retirees and savers, says the ‘expert. On the other hand, it will lead to a decline in US dollar exports, which is bad for exporting companies, and an increase in government debt service and other loans, which is bad for the budget, students, lenders. mortgage and business in general, adds Emelyanov.
He said that the United States’ major trading partners, including Europe, Japan and China, are actually happy with their cheap currency because they are in no rush to raise interest rates. In this way, they can maintain their growth by increasing their exports to America to ever higher values in their own currency.
“If they want to raise their currency against the dollar, there is nothing easier: they have to raise interest rates so high that they outperform the Federal Reserve. But it doesn’t make much sense. Central banks don’t play the game.” who has the strongest currency. “For them it is important to keep inflation, GDP growth and unemployment at an acceptable level, keeping a balance between them. Europe, for example, is clearly reluctant to complete its labor market when the economy is already feeling the effects of the energy crisis and the conflict in Ukraine. An increase in the main interest rate will stifle economic activity, collapse the housing market and it is not a fact that it will quickly beat the inflation, “explains Emelyanov.
However, the dollar cannot be that strong forever.
“After the Federal Reserve raises interest rates to 3.25%, as most expect, it will have another 1-1.5% increase if inflation falls. That is, the regulator is in the phase. As a result, the dollar index could add another 5% to the euro before reversing. It won’t be terrible for the markets. It’s just that for some time the euro will be worth not one to one, but 0.95 per dollar. And then it will most likely switch to growth, “predicts Emelyanov.
Deev believes that a strong dollar will sustain the US economy for a while, but then it will fall into recession again (a decline in GDP for two consecutive quarters is a recession).
“The main risk of this is that the United States will default, which means that all investments in American securities will turn to nothing. The enormous public debt and the increase in government bond yields make this option unavoidable.” States simply they will not be able to honor their treasury bills, they have long had nothing to pay their debts with. This will mean the collapse of the world financial system and a global crisis of unprecedented proportions for many years to come, until a new leader will appear and the world will stop on a new currency, ”Artyom Deev makes a long-term forecast.
Natalia Milchakova believes that, at least in the next few years, the dollar can go through cycles of strengthening and, conversely, weakening. “But nothing fundamentally bad will happen to him. One day, in the long enough future, the dollar, perhaps, like other world reserve currencies, could be replaced by the sovereign digital currencies of other countries and perhaps by non-sovereign cryptocurrencies. case the world economy cannot do without a crisis “, does not exclude the economist.
For residents of Russia, the growth of the dollar against the world currency basket is, of course, not as important as the exchange rate of the ruble against the dollar and other currencies. “Given the large budget deficit, the threat of an oil embargo and the decline in world oil demand due to the recession, it could turn out that the dollar will grow stronger in Russia than in the rest of the world,” Emelyanov says out. .
The strengthening of the ruble is still a temporary phenomenon, the result of extreme conditions in the form of reduced imports and restrictions on the demand for currency, Deev agrees. But for the Russian economy, according to him, the risk of falling into crisis is much more important against the backdrop of Russia’s systematic cut-off from sales markets and the purchase of critical import needs.
“As the Russian economy goes into crisis, the phenomena will acquire an overwhelming character. We are already seeing a budget deficit and a reduction in spending limits, followed by a decrease in production, an increase in business failures, an increase unemployment, a decrease in the income level of citizens and so on. But it will probably be possible to get out of this situation with the transition of the economy to the rails of mobilization, which will certainly be announced shortly “, concludes Deev.
Translation: V. Sergeev
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