It’s not personal – US dollar strength is an offer Washington can’t refuse
- Washington is unmoved by the unease around the world at the US dollar’s appreciation because the currency’s strength is in the country’s interest for now
- Until the markets see an end to interest rate increases or shifts in US policy, they will expect the dollar to get more expensive and act accordingly
“It’s not personal, Sonny. It’s strictly business,” Michael Corleone said in Francis Ford Coppola’s 1972 cinematic masterpiece The Godfather. The same sentiment applies in 2022 to the US dollar as its continued appreciation on the foreign exchanges causes unease in capitals around the world while Washington is unmoved.
But if the driver of Friday’s price action was primarily US dollar strength rather than yuan weakness – as seems to have been the case – then arresting the move, let alone reversing it, is not going to be easily achieved.
At the same time, in the absence of coordinated intervention by both Tokyo and Washington to turn the tide of yen weakness, the currency markets are likely to conclude that such unilateral action by the Bank of Japan on behalf of the Ministry of Finance just provides better levels to buy US dollars.
While the US central bank has a federal funds rate target of 3 to 3.25 per cent, Harker said that “given our frankly disappointing lack of progress on curtailing inflation”, the Federal Reserve will “be well above 4 per cent by the end of the year”.
Until the markets perceive that there is an end in sight to Fed rate increases or that the Biden administration is less comfortable with US dollar strength, the line of least resistance for the foreign exchanges is to expect the dollar to be more expensive tomorrow than it is today and act accordingly.
Even those who exit long US dollar positions are finding themselves having to re-enter the same trades or, to paraphrase Michael Corleone from The Godfather Part III, just when they thought they were out, they get pulled back in. That’s just how it is.
Neal Kimberley is a commentator on macroeconomics and financial markets