Macroscope | Is the US dollar invincible, or just the best house in a bad neighbourhood?
- Dollar strength has been a wrecking ball swinging through forex markets, buoyed by the Federal Reserve’s interest rate increases and severe problems facing other major economies
- If the Fed were forced to cut rates – because the US enters recession or due to a threat to the global economy – the dollar would depreciate
Just a cursory glance at the abysmal performance of leading asset classes this year shows there are few places for investors to hide. Among more than 35 assets across developed and developing markets tracked by JPMorgan, only two major ones have delivered positive returns.
The first is commodities, which have been driven higher by price shocks stemming from Russia’s invasion of Ukraine. It is the second, however, whose rise has been unrelenting and has more momentum behind it.
The US dollar’s rapid ascent has been a wrecking ball swinging through foreign exchange markets. While emerging market currencies have suffered, most of the damage has been in advanced economies.
The damage extends far beyond currency markets. Many countries and companies, especially in the developing world, borrow in dollars. When the US’ currency strengthens sharply, the cost of servicing dollar-denominated debt from revenues in local currency increases, resulting in a liquidity squeeze.