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The US dollar’s surge strengthens its global dominance amid search for safety

Agnes Lovasz Agnes Lovasz 02/11/2022
The US dollar’s surge strengthens its global dominance amid search for safety The US dollar’s surge strengthens its global dominance amid search for safety
The US dollar’s surge strengthens its global dominance amid search for safety Agnes Lovasz


The dollar is back with a vengeance 

The market turbulence triggered by runaway inflation, fears of a global recession and the war in Ukraine seems to have halted the slow erosion of the US dollar’s dominance.  


Despite widespread predictions that the greenback’s global significance in global finance will shrink, the factors underpinning its current strength also mean that the emerging alternatives, such as the Chinese yuan (CNY), cryptocurrencies or central-bank digital money, are unlikely to dent its hegemony.  

 

Higher yield 

The dollar is the strongest it’s been for two decades. The US dollar index (DXY), which tracks the US currency’s value against a basket of six major currencies, the euro (EUR), the Japanese yen (JPY), the British pound (GBP), the Canadian dollar (CAD), Swedish krona (SEK) and the Swiss franc (CHF), has gained 17% this year.  
 

This dramatic upward swing has been a function of the US Federal Reserve taking a more aggressive stance against skyrocketing inflation than its peers — the European Central Bank, the Bank of England, and other major central banks.  
 

The Fed lifted its target policy rate in four large steps to between 3.75% and 4.00% by early November. It was close to zero at the beginning of the year. Futures pricing predicts a 57% probability that the key US interest rate will reach as high as 4.50% by year-end, according to the CME Group’s FedWatch Tool. 


Source: CME FedWatch tool; Data as of 7 Nov 2022


Fed target rate predictions of futures traders for end-2022 
 

This higher yield has lured investors hungry for returns into dollar-denominated assets, further strengthening the greenback.  

 

Troubled times 

Economic challenges around the globe abound. The resulting financial market volatility is prompting investors to take shelter in the dollar, seen as a safe haven in troubled times. Many major currencies, such as the euro, the Japanese yen, the British pound, and the Chinese yuan, have reached multi-year lows against their US counterpart.  


Source: ThinkTrader 

US dollar index, year-to-date performance
 

It’s not only the highest inflation rates in more than 40 years that are contributing to the economic upheaval. The war in Ukraine is still raging, pushing up the price of energy, and hurting the economies of fuel importers, among them many European countries that share the euro. The single currency sunk to below parity with the dollar (EUR/USD) earlier this year on concern of an impending economic downturn in the euro region, and on views that the ECB wasn’t tough enough on inflation.  
 

On the flip side, the US as a net energy exporter is one of the beneficiaries of higher energy costs. This helps the US economy perform better than other major economies, feeding dollar strength yet again.  

 

The Chinese economy, the world’s second largest, is being hit by ongoing lockdowns and other restrictions under the country’s zero Covid policy and a real-estate market rout. The yuan has also depreciated sharply against the dollar (USD/CNY), even after several attempts by the authorities to support it. 

 

In the UK, the pound touched a record low against the dollar in September (GBP/USD) on concern that fiscal measures put forward by the new cabinet will prove unsustainable. The government was forced to reverse tax cut plans, even costing the prime minister her job, and the Bank of England needed to step in, in an unprecedented move to stabilise the pound.  

 

The Bank of Japan also sold dollars last month to prop up the yen for the first time since 1998, following a more than 20% slide in the value of the Japanese currency versus the dollar (USD/JPY).  
 

Forex trading 

While this large-scale volatility opens plenty of opportunities for foreign-exchange traders, they also must tread carefully and apply risk management tools to avoid getting burned by sudden currency swings. 

 

Of course, the dollar’s appreciation is not a one-way street. According to some analysts the greenback is ripe for a correction. Should the Fed begin to focus on stimulating growth, instead of combatting inflation, the dollar’s downtrodden counterparts could begin to rebound.  

 

The likelihood of such reversal may be slim after the latest labour-market report revealed that the US economy was in rude health. Companies added more jobs than economists had forecast, and the unemployment rate unexpectedly fell. 

 

Take a view on which way the US dollar and foreign currencies will go by trading forex contracts for difference (CFDs). Go long, or go short with ThinkMarkets, with excellent trading conditions. 

 

Great pretenders  

The dollar has been the preeminent currency in global finance since World War II. Central banks hold about 60% of their reserves in the US currency and most government borrowing is also done in dollars. It’s the currency most often used to settle trade transactions, and most commodities, from oil to gold, are priced and traded in dollars.  
 

What’s more, in foreign exchange markets, the US dollar is involved in almost 90% of all transactions, according to a paper prepared for US lawmakers by the Congressional Research Service.  
 

In the current volatile environment and because of the dollar’s sheer weight, any unexpected geopolitical event or economic indicator might send ripples through currency markets.  
 

Trade the volatile forex market today. However, to limit exposure to currency swings, make full use of technical analysis and risk management tools available on ThinkTrader.  
 

In recent years, there have been a growing number of pretenders to the dollar’s crown. But for now, the economic constellation is favourable for entrenching the dollar’s position as the dominant global currency.  

 

Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Meet our contributors
Carl Capolingua
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Carl Capolingua
Market Analyst, Melbourne

Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions. Specialising in Australian and US stock markets in particular, Carl uses a top-down approach to assess the global macro picture before using both technical and fundamental techniques to select stocks. He regularly appears as an expert commentator on a number of media outlets throughout the Asia-Pacific region.
 
 
 

Lesego
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Lesego Mthombothi
Market Research Analyst, South Africa

Lesego Mthombothi is an experienced market research analyst and investment professional who proudly holds an honours degree in investment management and completed her CFA level 1.
 
 
 

Mahmoud Alkudsi
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Mahmoud Alkudsi
Chief Markets Analyst, MENA

Mahmoud is a market analyst, with over a decade of experience in financial markets. He follows main market movers and tracks their effect on the price chart. Mahmoud mixes technical and fundamental tools with a deeper focus on the technical side, and with his wide experience in providing educational and guidance materials to all levels of traders, he helps them in making informed trading decisions. Before joining ThinkMarkets, Mahmoud was head of market research departments in different reputed financial companies, where he provided market analysis for a variety of asset classes, including FX, equities, indices, and commodity futures. As an experienced market commentator, he was hosted by too many print and broadcast media, including not limited to Sky News Arabia, France 24, Alarabyia, Alsharq-Bloomberg, and CNBC Alarabyia to discuss key risk events their clear impact on the price action. Mahmoud holds a Master of Business Administration (MBA) from Cardiff Metropolitan University of Wales, UK, and speaks Arabic, English, and Spanish.

Shawn
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Shawn Lee
Market Analyst, Malaysia

Shawn Lee has over eight years of experience in the financial market as a market analyst. Shawn provides market key insights and trade ideas through the market and technical analysis. He also held trader roles and guided traders in maximising one’s trading success.

Carl Capolingua
Carl Capolingua
Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions.
Lesego
Lesego Mthombothi
Lesego Mthombothi is an experienced market research analyst and investment professional who proudly holds an honours degree in investment management and completed her CFA level 1.
Mahmoud Alkudsi
Mahmoud Alkudsi
Mahmoud is a market analyst with over a decade of experience in financial markets. Mahmoud mixes technical and fundamental tools with a deeper focus on the technical side, and has experience in providing guidance to all levels of traders.
Shawn
Shawn Lee
Shawn Lee has over eight years of experience in the financial market as a market analyst. Shawn provides market key insights and trade ideas through the market and technical analysis. He also held trader roles and guided traders in maximising one’s trading success.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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