The U.S. Dollar Index (DXY) got to the highest closing level since December 2002. The U.S. Dollar has been increasing against all of the major currencies within the DXY index as well as some of the largest emerging market currencies. Historically, a large increase in the U.S. Dollar exchange rate signals a tightening in lending conditions for offshore U.S. Dollar access. This can be a negative indicator for future economic activity as much of global trade activity takes place in the U.S. Dollar, and if the cost and ability to access those dollars becomes constrained, it becomes harder for global companies to transact and settle accounts. This can also have negative impacts on financial markets as much of the trading takes places on a leveraged basis, and a tightening in lending conditions can lead to higher margin requirements and an increase in collateral quality standards.
In the month of April, the DXY index increased by 4.7% and closed at 103.62 on April 28th, which was the highest closing price since December 2002.
Source: Koyfin.
The DXY index is heavily weighted to the Euro, but the U.S. Dollar had made gains against several of the major developed market currency pairs.
Source: Koyfin.
The Euro/U.S. Dollar exchange rate made a low on April 28th of 1.05 euros/U.S. Dollar, a level last reached in January 2017, and close to the lowest level since December 2002.
Source: Koyfin.
The U.S. Dollar/Japanese Yen exchange rate reached $130/Yen on April 28th, a level not reached since April 2002.
Source: Koyfin.
The Great British Pound reached the lowest level since July 2020, the New Zealand Dollar is at the lowest level since June 2020, the Norwegian Krone is at the lowest level since November 2020, and the Swiss Franc is at the lowest level since May 2020.
On the emerging market side, the Brazilian Real, Chinese Yuan, South Korean Won, and Indian Rupee were all down vs. the U.S. Dollar in April.
Source: Koyfin.
The Indian Rupee ended April at $76.5/Indian Rupee, close to the $77/Indian Rupee reached in March 2022 (which was the all-time low of the Rupee vs. U.S. Dollar).
Source: Koyfin.
The Chinese Yuan ended April at $6.60/Yuan, which was the lowest level since November 2020.
Source: Koyfin.
The Brazilian Real had been performing well vs. the U.S. Dollar and was at the highest level since March 2020 prior to the decline in April (helped by higher commodity prices).
Source: Koyfin.
The South Korean Won closed near the lowest level vs. the U.S. Dollar since 2009.
Source: Koyfin.
On the collateral side, one-month Treasury Bills are the most sought-after asset to use for securitized lending as they have very low volatility and high levels of liquidity. When lending conditions tighten and collateral quality standards increase, there tends to be an increase in demand for Treasury Bills. The one-month Treasury Bill rate declined to 0.27% on April 28th and ended at 0.37% on April 29th. This was a decline from the intraday high of 0.60% on April 22nd and well below where the Fed Funds range target is expected to go at the meeting on May 4th (a 50bps increase would take the Fed Funds target range from the current 25-50bps to 75-100bps).
Source: Bloomberg.*
The increase in the U.S. Dollar exchange rate (more demand, tighter supply) and decline in one-month Treasury Bill yields (more demand for high quality collateral) can have a negative impact on financial markets. During the month of April, U.S. high yield corporate spreads widened, major U.S. equity market indices declined, and some commodity markets declined.
Source: Koyfin.
A continued increase the U.S. Dollar exchange rate and higher collateral quality standards will likely have a negative impact on economic growth and lead to higher market volatility.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
*Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material or guarantee the accuracy or completeness of any information herein, nor does Bloomberg make any warranty, express or implied, as to the results to be obtained therefrom, and, to the maximum extent allowed by law, Bloomberg shall not have any liability or responsibility for injury or damages arising in connection therewith.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC