A gauge of US dollar strength rose to its highest level in two decades, spurred by a hawkish Federal Reserve and concerns about sharp slowdowns in economic growth elsewhere around the world.
ICE U.S. Dollar Index rose 0.9% to hit the highest level since 2002, surpassing its 2017 high, before tapering higher. The Fed is raising rates to control rising inflation, boosting US yields. The dollar is also receiving support as the spread of the coronavirus in China, as well as the fallout from the Russian invasion of Ukraine, threaten an economic slowdown, increasing demand for investment havens.
«The US dollar provides a hedge against a significant deterioration in global growth, and is a highly positive carry, particularly against the euro,» said Citigroup Inc. strategists, including Yasmin Younes. «USA. remains well insulated from downside risks around Russia-Ukraine.”
The move is being driven by weakness in the dollar’s major crosses, with the yen sinking to a 20-year low and euro weakness putting parity against the dollar on sight. US Treasury bond yields have led a global rise in recent months.
The ICE index has a greater weight in the euro, while the Bloomberg indicator uses a basket of 10 currencies that is revised annually, including emerging markets such as the Mexican peso. That suggests the current bout of dollar strength is not as broad as it was during the height of the coronavirus panic.
“The risk of an abrupt Russian gas cutoff and war in Europe are deteriorating growth prospects for Europe and local currencies, while Asia is grappling with its own growth problems and countries like China and Japan remain in growth mode. monetary easing,” said ING Groep NV strategists led by Chris Turner. «It’s hard to see this environment changing in the next six months, which means it looks like this dollar boom will continue.»
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