haktutscoinmaster50| Risk aversion, interest rate spread? Read why the US dollar is so strong: The "culprit" is still the US economy is too hot

Financial Associated Press, April 22 (editor Xiaoxiang)-Global financial markets are suffering from aHaktutscoinmaster50They did not expect the "power" that would emerge in 2024: the strong dollar made a comeback and seemed to continue to exist.

As we described in the "one Picture understand" series of telegrams on Friday, as the Mexican peso, known as the "super peso", plummeted last week, of the 35 major developed and emerging market currencies tracked by the industry, only Kenyan shillings have been able to rise against the dollar this year, and all other non-US currencies have been on the weak side in the "contest" with the dollar.

The Bloomberg dollar index has also expanded to more than 4 per cent so far this year against the backdrop of almost full appreciation against both G10 and emerging market currencies.

Non-commercial positions in the dollar were bearish at the start of the year, but bullish bets have soared to their highest level since 2019, according to the Commodity Futures Trading Commission (CFTC).

So how is the current strong position of the US dollar in the foreign exchange market forged?

In their recent interpretation of the foreign exchange market, many foreign exchange analysts and traders may mainly mention two points: one is the widening "spread advantage" between the United States and other economies in the face of soaring US bond yields.Haktutscoinmaster50The second is the demand for the "safe-haven currency" dollar during the recent geo-crisis in the Middle East.

However, neither of these two points may be directly related to the nature of the current appreciation of the dollar: the "risk aversion" factor is more like a catalyst for the accelerated rise of the dollar, but without this catalyst, the dollar will not change the pattern of strength in the end. Although the "spread" factor seems to be a "cause", it is still a "result" in essence-in the view of many industry insiders, the real reason why it is difficult for the dollar to meet rivals in the foreign exchange market may also be that the performance of the US economy is really too hot.

The fiery American economy

During his campaign in Pennsylvania last week, President Joe Biden boasted that "America's booming economy is the strongest in the world." Although the facts are clearly not as awesome as Biden boasted, in any case, the red-hot US economy is becoming a big problem for global monetary policy officials. No wonder finance ministers meeting in Washington sent a different message: please cool the US economy.

The new forecasts released by the IMF earlier this month show how unusual the US economy is. The organization will increase its estimate of GDP for the United States in 2024 from 2. 2 in January.Haktutscoinmaster50.1% up to 2Haktutscoinmaster50.7%, more than double the expected growth rate of other G7 member countries. With the uproar of "American exceptionalism", it continues to prop up US debt and US bond yields, which undoubtedly increases the attractiveness of the dollar.

Ales Koutny, head of international interest rates at the Vanguard, said, "if economic growth and inflation in other countries are not comparable to those in the United States, then there is no choice but to buy dollars. For us, previous deals were very tactical, but now we are beginning to look at the continued strength of the dollar and the US economy from a long-term structural perspective. "

A series of signs that the US economy has emerged from the slowdown that many expected-the labour market remains tight and manufacturing activity continues to expand, has led to a resurgence of the dollar. Inflation, which has become more sticky, has also made Federal Reserve Chairman Colin Powell and other Fed policymakers wait longer than expected to cut interest rates. Williams, the No. 3 figure in the Federal Reserve and chairman of the New York Fed, even raised the possibility of resuming interest rate hikes if necessary last week.

"at the beginning of the year, I was more inclined to be bearish on the dollar, but that's not the case anymore," said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA. Powell's remarks undoubtedly changed the situation. "

Barry Eichengreen, an economist at the University of California, Berkeley, also pointed out that "as long as the US economy is stronger than other G7 countries, the dollar will strengthen against other G7 currencies." Not everyone will be happy with this scene, but there will be nothing they can do about it. "

Interestingly, if you look at the nature, many people think that the current hot performance of the US economy is still largely driven by frenzied spending. Cristina Georgiyeva, president of IMF, said last Thursday that while it helped support global economic growth, it also meant that the US was "slightly overheated"-in part because of its fiscal stance, whose budget deficit was close to 7 per cent of gross domestic product.

"this is of course worrying. All eyes in the world are on the United States, and many delegations question how long the Fed will hold out before cutting interest rates. That's what I hear from all over the world, "she said in a television interview.

Pierre-Olivier Gourinchas, chief economist of the IMF, said last week that the US budget position "poses long-term fiscal and financial stability risks to the global economy".

A sharp contrast to the spread of interest rates

The most intuitive reflection of the hotter background of the US economy than that of other countries, especially developed economies, will undoubtedly be reflected in the fixed-income market.

Us bond yields have soared again in recent weeks as markets have scaled back their bets on Fed easing, with two-year yields rising above the 5 per cent mark earlier this month. As a result, interest rate spreads have become a big driving force for the attractiveness of the dollar.

Peter Vassallo, portfolio manager at BNP Paribas Asset Management, said, "what is unique now is that the yield on the dollar is so high. If you are a global allocator and are managing your portfolio, the way to improve risk-adjusted returns is to buy unhedged short-term US Treasuries. "

Judging from the current pricing in the interest rate swap market, traders generally believe that the Fed may not want to cut interest rates until September at the earliest, and if the election factors are taken into account, the first cut will even be postponed until the end of the year.

Jane Foley, head of foreign exchange strategy at Rabobank, said in a recent report, "doubts about whether the Fed can cut interest rates at the Fed's Open Market Committee meeting in June are spreading. In addition, coupled with political risks, the prospect that the dollar will remain strong for a longer period of time. "

In sharp contrast to the decline in Fed easing expectations, traders still widely believe that the ECB and the Bank of England will open the door to interest rate cuts by the middle of the year. ECB President Christine Lagarde hinted earlier this month that European Bank policy makers could cut interest rates in June.

Tiffany Wilding, an economist at PIMCO, and Andrew Balls, chief investment officer for global fixed income, said they expected further evidence that the US economy was outperforming other countries and that the company preferred the dollar over the euro and other European currencies such as the Swiss franc and the Swedish krona.

"the interest rate environment in the United States is more attractive, and the return on the dollar is very high," said Ed Al-Hussainy, global interest rate strategist at Threadneedle Investments.

Jonathan Petersen, senior market economist at Capital Economics, believes that US economic growth and inflation are likely to remain strong rather than weakening as expected, forcing the Fed to keep interest rates high as other central banks cut interest rates. "this will be enough to push spreads [against the dollar] back to where they were at the end of 2022."

Geopolitical risk aversion forms "catalyst"

In addition to differences in macroeconomic performance and the advantage of interest rate spreads, another factor that has accelerated the recent strength of the dollar is safe-haven demand.

In times of political or financial turmoil, the dollar is often seen as a safe haven by asylum-seeking investors. The safe haven status of the dollar was fully demonstrated after Israel launched a retaliatory strike against Iran on Friday.

Eurizon SLJ Capital Ltd. CEO Stephen Jen has put forward the popular "dollar smile" theory, which helps explain the safe haven status of the dollar. According to Jen's theory, the dollar rises when the US economy booms or falls into a deep recession, while it weakens during periods of moderate economic growth.

Jen said in a recent interview that increased geopolitical risks and economic prosperity have created a "steeper smile curve" and a more curved "U-shaped". The current geopolitical risk brings a risk aversion premium.

Pioneer, the world's second-largest fund manager, is already adjusting its dollar strategy and now expects the dollar to continue to strengthen. UBS Asset Management also believes that although the dollar is now 20% higher than usual, it is likely to appreciate further. At the same time, the Wells Fargo Investment Institute abandoned its forecast that the dollar would weaken by the end of the year and now believes that the dollar's rise will continue until 2025.

It is not difficult to see that the surge in the dollar has put pressure on exchange rates and economies in other economies around the world. Last week, exchange rates in countries such as India and Nigeria fell to record lows, while officials from Japan to Poland warned of intervention.

Central banks in developed markets such as Australia, the eurozone and the UK are likely to find that their room to lower interest rates in the future is limited if weak exchange rates trigger domestic inflation. Countries burdened with foreign debt, including Maldives and Bolivia, as well as those heavily dependent on imports from the United States, will suffer the most.

Earlier this month, the G7 reiterated their common position on the damage that could be caused by disorderly currency fluctuations, in a sign of growing anxiety over the rapid appreciation of the dollar. Before that, U.S. Treasury Secretary Yellen also shared the concerns of Japan and South Korea about the sharp fall in their currencies, which could provide room for Japanese and South Korean authorities to intervene.

Although the author of "arrogant Privileges: the rise and fall of the dollar" does not believe that a strong dollar will lead to confrontation, he does believe that it will be increasingly difficult for developing countries with dollar debt to repay their debts.

However, according to some observers, including Marko Papic, chief strategist at Clocktower Group, a stronger dollar may still bring "a glimmer of hope" to Europe, Japan and others. Given that the rest of the world is mostly export-oriented, this may still eventually help boost the global economic recovery, according to the chief strategist at the alternative asset manager.