Among all the drastic volatility in 2022, one thing investors can still count on: the soaring dollar.
ICE USD index rose 0.7% on Wednesday, which measures the exchange rate of the USD against a basket of six other currencies as the USD continues to hit major currencies such as the USD against the Japanese Yen and pound against the USD, while causing widespread damage worldwide.
Meanwhile, the Dow Jones Industrial Average (DJIA), the U.S. S&P (SPX) and the U.S. COMP index (COMP) have all fallen further this year to double digits, with global government bonds falling into one of the largest bear markets in history, and even gold has experienced a turbulent year.
Although the forecast shows that the US economy may fall into a recession 100% in the next 12 months, it is necessary to take a step back to understand why the US dollar far exceeds other assets' performance.
First of all, currency trading is always related to the situation in other parts of the world, and at present, the rapid rise in US interest rates relative to other countries is the main reason for the appreciation of the US dollar. In professional terms, this is called the interest rate difference, or the monetary policy difference between the central bank .
Federal Reserve (Federal Reserve , referred to as: Federal ) insists on suppressing inflation by continuing to significantly raise interest rates , especially after the stronger-than-expected consumer price index (CPI) rose 8.2% year-on-year in September. Meanwhile, Europe — which announced its annual inflation rate of 9.9% in September on Wednesday — is facing the energy crisis , which has taken the interest rate of the European Central Bank on a shallower path, according to the International Monetary Fund (imf). In Asia, Japan and China are still at low inflation rates, allowing the central banks of the two countries to resist global tightening trends.
Globally, this interest rate difference is weakening the exchange rate of a range of currencies against the US dollar.
continues to strengthen, even raising questions about whether intervention is needed like the 1985 "Plaza Accord", but analysts doubt whether there will be coordinated actions to control the US dollar. An important reason is that the strong dollar helps to curb domestic inflation by reducing import costs, thus helping the Fed to some extent accomplish its work.
Tom Nakamura, portfolio manager and forex strategist at AGF Investments in Toronto, said: "The current difficulty lies in the speed at which the dollar is strengthening, at which the dollar's strengthening may become fierce and problematic," said AGF Investments, managing CAD 38.4 billion (US$27.8 billion) as of September.
"When businesses in other countries try to fulfill debt denominated in USD, such a strong move could trigger liquidity or credit crisis . I don't think things have developed to that point yet. But both forex markets and interest rates, speed is important because it's a process of adjustment. The faster it happens, the less likely it will be to economies around the world to adapt to it and absorb it smoothly."
DXY explains
judging the performance of the dollar, the most common of which is to use the Intercontinental Exchange dollar index (ICE U.S. dollar Index), which is calculated approximately every 15 seconds based on the spot price of different currencies. The six currencies, Euro, Japanese yen, British pound, Canadian dollar, Swedish kroner and Swiss franc , are weighted to calculate the performance of the US dollar. Data from
FactSet shows that the index rose nearly 18% in 2022, only 1.6% below its more than 20-year high set at the end of September last year.
Interestingly, according to data provided by BlackRock Investment Institute on Monday, Brent crude is the only asset that outperformed the U.S. dollar index this year. BlackRock Investment Research Institute is a research institution under the world's largest fund management company.
You may have heard people describe the dollar as a sabotage ball, and the reason is easy to understand. First, foreign governments and private enterprises have trillions of dollars in debt that they are difficult to repay.On the other hand, profits and sales of U.S. multinationals operating in multiple countries are declining.
According to a report by Credit Suisse Group AG, U.S. businesses will lose about 1% on average for every 8% to 10% increase in the U.S. exchange rate.
U.S. businesses have been lamenting the rise of the dollar since at least June, with more signs this week showing how much damage a strong dollar has caused.
JJ 3 said it was under pressure from the dollar and therefore lowered its sales forecast this year, even as the company reported third-quarter earnings exceeded expectations. Streaming giant Netflix links the dollar's strength to a weaker fourth-quarter outlook. Procter & Gamble blamed the strengthening of the dollar and rising inflation for the reason that the fiscal year's earnings may be at the low end of its forecast range.
SEI chief market strategist Soloway, who manages about $1.3 trillion of assets, said he would not be surprised if the dollar trend temporarily reverses. Meanwhile, a team at JPMorgan said that as investors flee nearly all asset classes this year, the appearance rate reached a 10-year high. "We continue to go long for $3 to hedge the Federal Reserve's hawkish stance in the short term with ."
stock portfolio was impacted
Although this is not always the case, analysts said the strengthening of the dollar has obviously exacerbated the downsides facing the U.S. stock market this year. This is a "significant negative" for the S&P 500 index , with industrial, materials, consumer necessities and technology stocks most sensitive to the strengthening of the US dollar. In contrast, stocks in industries such as finance, utilities and real estate investment trusts should be more affected.
The double-digit decline in the stock market in 2022 has caused investors to have a headache, and it is forgiven for them to escape if they still have money.
Today’s strong dollar has benefited American travelers in booking hotel accommodation, paying for food and fun excursions in Europe, the UK, Japan and almost anywhere else.
The cheapest places to travel with USD include Costa Rica , Vietnam and Romania - but anywhere outside of 50 states in the United States can do it. Some wealthy Americans have gone even further, splurged on European houses, and a single purchase could be tens of thousands of dollars cheaper than earlier this year.
AGF Investments' Nakamura said on a phone call on Wednesday, "The concept of a strong dollar may be beneficial in different situations. It can relieve the inflationary pressure that would have been greater at home. Foreign exporters can benefit from the depreciation of the currency relative to the US dollar, which means Americans can enjoy cheaper imports. For ordinary Americans, if they travel abroad, they can also benefit from the appreciation of the US dollar."
This article comes from the financial world
