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The dollar is powering a slowdown in the global economy that would take the U.S. down along with it.
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For now at least, investors have yet to call a top in the dollar rally, in part because bets at the end of 2021 that the dollar had peaked have been thoroughly undermined.
Although a stronger dollar is supposed to make imports for Americans cheaper, hardly anyone has noticed it as supply chain snarls and the Russian invasion of Ukraine has added to commodity and fuel price pressures.
But with the U.S. Federal Reserve raising rates and the bulk of global offshore debt denominated in the greenback – the dollar is powering a slowdown in the global economy that would take the U.S. down along with it.
The Bloomberg Dollar Spot Index has risen by an astounding 7% since January to a 2-year high as the U.S. Federal Reserve embarks on its most aggressive series of rate hikes in over two decades.
While it would stand to reason that a rising dollar should help the Fed cool prices and support American demand for foreign goods, it also increases the raw material and input prices of feedstock into the manufacturing process that spills into U.S. imports anyway.
Where it does help though is for global investors whose assets are American, and who have seen the value of their dollar-denominated investments soar relative to their home currencies.
The euro hit a fresh 5-year low against the greenback and the Swiss franc is now at parity with the dollar – for the first time since 2019.
Other countries have had to respond to the rapidly rising dollar as well, Hong Kong has had to intervene to shore up its currency peg, while Malaysia and India surprised with rate hikes.
The durability of the dollar rally is uncertain, and a combination of slowing U.S. growth and expected cooling of inflation means that investors who buy U.S. assets now, may find themselves with less relative to their own currencies when an equilibrium is finally found.
For now at least, investors have yet to call a top in the dollar rally, in part because bets at the end of 2021 that the dollar had peaked have been thoroughly undermined.
And given the weaker economic base from which the rest of the world is working from compared to the U.S., demand for dollar assets will likely feed into a self-perpetuating feedback loop, unless and until the rest of the global economy regains its footing.
