Analysis: ‘Perfect storm’ lifts dollar over unsettled markets

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NEW YORK, Oct 1 (Businesshala) – A grinding rally in the dollar is gathering pace, raising concerns over the prospect of a sharp tilt from the Federal Reserve, rising Treasury yields and a drawn-out fight to raise the US debt limit. .

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The greenback is up 4.7% year-on-year and is close to its highest level in a year against a basket of currencies. Net bets on the dollar in futures markets are at an 18-month high, according to data from the CFTC.

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Speculators are bullish on the dollar since March 2020

Because the dollar is the world’s dominant currency, its trajectory can have far-reaching implications for everyone from corporations to global central banks.

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While a strong dollar can be a sign of economic strength, a very sharp rally in the currency can also affect the balance sheets of US exporters, making their products less competitive overseas and allowing multinationals to withdraw their funds. Converting your funds can be more expensive. domestic currency.

“The US dollar move we are currently seeing is due to a confluence of factors that are all aligning to create the perfect storm,” said Simon Harvey, senior forex market analyst at Monex Europe in London.

A key driver of the dollar’s strength has been the more aggressive Fed, which last week said it would begin shelling out its $120 billion in monthly government bond purchases as early as November and potentially start raising rates in 2022, Earlier than some investors expected.

Yields on the 10-year United States Treasury Inflation-Protected Securities, which take away inflation, have risen by about 37 basis points since early August, compared with a rise of only 5 basis points for its German counterpart. This has increased the attractiveness of dollar-denominated treasuries compared to their foreign counterparts.

Richard Benson, co-chief investment officer at Millennium Global in London, said, “It appears the Fed was wrong to taper the dollar’s price.” “We have a 20-30 basis-point backup in yields which have supported the dollar.”

Real yields in the US grew faster than in Germany

A fierce battle over raising the US debt limit, which could result in a US default if lawmakers do not agree by October 18, is also pushing up the dollar, a popular destination for panicked investors.

Monex Europe’s Harvey said there are concerns about a slowdown in the country’s best-selling real estate developer, as well as concerns over rising inflation and potentially slowing growth, as well as the heavily indebted China Evergrande Group.

The S&P 500 (.SPX) fell 4.8% in September, its worst month since March last year, while the dollar index rose 1.7%.

“Most of these factors are pointing to a more stable inflationary macro environment thus prompting markets to take shelter in the dollar,” Harvey said.

Many are also trying to gauge the potential effects of the dollar on corporate balance sheets.

An analysis of Russell 1000 companies by Bespoke Investment Group showed that companies in the technology sector are most exposed to currency fluctuations, with more than 54% of total revenue coming from overseas. It is followed by the content sector, where about 46% of the total revenue comes from overseas.

“Despite the recent rally of the dollar, it is flat from a year ago and is below where it stood in previous years,” said Matt Weller, head of global research at

“Most companies will start to worry about those risks if the dollar index starts to approach the 100.00 level as we move into 2022,” he said. The index stood at around 94.25 late on Thursday.

Some investors believe the dollar’s strength is unlikely to last. Analysts at Neuberger Berman said in a recent note that the dollar has entered a multi-year bear cycle after peaking in March 2020 and will eventually turn lower.

Their forecast is based on a confluence of factors, including projections of a decline in the United States’ proportionate contribution to world GDP beginning in 2022, which the firm has said coincides with dollar weakness in the past.

Others, however, are betting that the Fed will keep the US currency higher in the coming months.

Analysts at Societe Generale said in a recent report that the dollar could rise as much as 10% from current levels on hopes of a Fed tightening.

Mazen Issa, senior FX strategist at TD Securities, expects real rate hikes to continue to support the dollar, although he does not believe the currency has reached a level where it could present problems for companies.

“The US dollar has demonstrated the ability to flex through key technical markers and will be difficult to open in the near term,” he said.

Businesshala Graphics
Reporting by Gertrude Chavez-Dreyfus and Saqib Iqbal Ahmed in New York and additional reporting by Ira Iosbashvili Editing by Matthew Lewis


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