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A rise in the U.S. dollar typically occurs in periods where the outlook for economic activity is weak.

The U.S. Dollar, using the DXY Index, is up 19% on a year-to-date basis and 27% from its cycle low on January 5th, 2021. As of September 26th, the index is at 113.88, its highest level since May 2002.

Source: Macrobond.

Listed below are a few callouts to provide global context to the current environment.

  • EUR/USD
    • Lowest level versus the U.S. Dollar since September 2002
  • GBP/USD
    • Lowest level versus the U.S. Dollar since March 1985
  • U.S. Dollar
    • All-time high versus the Indian Rupee
    • All-time high versus the Philippine Peso
    • Highest level versus the Malaysian Ringgit since January 1998
    • Highest level versus the Japanese Yen since August 1998
    • Highest level versus the Thailand Baht since August 2006
    • Highest level versus the South Korean Won since March 2009

Source: Macrobond.

On a 3-month and 1-month basis, the U.S. Dollar is outperforming all developed market pairs. Within emerging markets, the U.S. Dollar leads all pairs on a 3-month basis. On a 1-month basis, the U.S. Dollar leads all emerging market pairs except the Ukrainian Hyrvnia and Russian Ruble. The bar charts below highlight the breadth of the U.S. Dollar’s run-up versus select currency pairs over the last three months and year-to-date.

Source: Macrobond.

In an effort to combat domestic currency weakness, central banks have been following the Federal Reserve’s lead by raising rates. Despite these policy moves, all currencies but Brazil, are still lagging the U.S. Dollar on a year-to-date basis. Chile has hiked 675bps bringing their key rate to 10.75% in 2022 and their currency is down 17% to the U.S. Dollar. Canada has hiked in-line with the Fed and their currency is down 8%. India began the year with a 4.00% policy rate – it now sits at 5.40% while their currency makes all-time lows versus the U.S. Dollar.

Source: Macrobond.

Additionally, several countries have started to sell their foreign exchange reserves. Notably, Indian FX reserves are down 15% year-to-date, they are hiking rates, and their currency is down 9% year-to-date. A similar dynamic is playing out in Sweden, Chile, Turkey, China, and elsewhere. Central banks globally are enacting different strategies to protect against further devaluation of their currency, but the desired outcomes have not been achieved.

Source: Macrobond.

All of these signals point towards a global U.S. Dollar shortage amid rapidly tightening monetary conditions and weaker economic activity. This has historically created a negative feedback loop where the U.S. Dollar rises as the economic outlook weakens and then economic activity slows further as access to U.S. Dollars tightens.

 

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.

 

Joseph Khoury

Economic Analyst
Boyd Watterson Asset Management, LLC