U.S. Dollar exchange rates have implications for the trajectory of global economic activity. The majority of global businesses rely on access to U.S. Dollars in order to remain operational. A rising dollar increases the day-to-day costs of doing business internationally. Historically, the result is a less favorable economic environment for real growth.
The DXY Index is one way to track U.S. Dollar performance. After reaching a cycle-low of 89.44 on January 5th, 2021, the DXY has increased 21% to a twenty-year high of 108.16.
On a year-to-date basis, the DXY has increased 12.7%. The pace of this acceleration is noteworthy as businesses scramble to access and utilize the global reserve currency at an elevated cost.
To better understand the scope and scale of this impact, it is important to look at more than the DXY Index on its own. When considering the impact of increased business costs related to exchange rates, the charts below highlight several countries where a rising U.S. Dollar is likely to make an impact on real economic growth.
Beginning in South America, the U.S. Dollar versus the Brazilian Real, Argentinean Peso, Columbian Peso, Chilean Peso, and Peruvian Sol is at or near all-time highs. Zooming in on the last month, the U.S. Dollar has significantly outperformed South America’s five largest economies.
Moving to Asia, the Chinese Yuan has weakened significantly since April 2022. The U.S. Dollar versus the Japanese Yen is at its highest level since 1998 and the U.S. Dollar versus the Indian Rupee is at an all-time high. Rounding out the fourth and fifth largest economies by GDP in Asia, the South Korean Won and Indonesian Rupiah are at levels last seen during periods of global slowdowns. The pace of the U.S. Dollar’s outperformance relative to these Asian currency pairs has accelerated on a three-month basis.
There has also been notable currency deterioration versus the U.S. Dollar in smaller Asian countries such as Thailand, Philippines, Singapore, Malaysia, and Sri Lanka. Similar to the Asian currency pairs above, the pace of weakness versus the U.S. Dollar has accelerated on a three-month basis.
Turning to Europe, the Euro is at its weakest level versus the U.S. Dollar in twenty years. Excluding the pandemic, the U.S. Dollar versus the British Pound is at its highest level since 1985. On a three-month basis, the U.S. Dollar has risen north of eight percent versus both the Euro and British Pound.
Given these currency dynamics, the cost of doing business internationally has moved in a negative direction. We believe the scope, scale, and synchronicity of these currency moves is likely an indication that global economic activity will slow.
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.
Senior Economic Analyst
Boyd Watterson Asset Management, LLC