Over the past week, concerns over a hawkish Federal Reserve and the possibility of a global recession have fueled demand for the ultimate safe haven in the greenback, whose recovery has been reflected in sharp losses across all major currencies.
The euro fell below 1 to 1 against the dollar, South Korean authorities verbally intervened to prevent the Korean won from falling to a 13-year low, and the dollar rose to a key level of 140 against the yen, dashing hopes of a rebound in the yen.
“Unless there is a major shift in fundamentals and the Fed’s rhetoric, it would be absolutely foolish to sell the dollar at a time when the world is so nervous,” said Nick Twidale, Asia-Pacific chief executive of brokerage FP markets.
The rally appears to have plenty of room to spare, with Fed Chairman Powell’s hawkish remarks at the Jackson Hole symposium later this week likely to exacerbate the dollar’s gains.
The dollar’s smile doesn’t seem to have changed,” said Win Thin, global head of foreign exchange strategy at Brown Brothers Harriman, referring to the theory that the dollar strengthens during a U.S. economic outperformance or recession. If “the risk-off impulse subsides, the dollar should continue to benefit from a relatively strong U.S. economic outlook and rising Fed tightening expectations.”
Optimistic environment for dollar rally
There are a number of potential drivers for further dollar appreciation, depending on both sides of the “dollar smile” equation. One is betting on weakness in major currencies, from faltering European currencies to the safe-haven yen.
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Hedge funds’ net short bets on the euro have risen to a three-week high, while short bets on the pound climbed to their highest level since March 2020, according to the latest data from the U.S. Commodity Futures Trading Commission. At the same time, asset managers have stepped up their efforts to short the yen.
JPMorgan, the most pessimistic euro forecaster by the end of the year, expects the euro to fall to $0.95 per dollar by December, according to Bloomberg data. RBC Capital Markets expects the pound to fall by more than 5% to $1.11 over the same period, while the RBA expects the Australian dollar to fall to $0.65.
In a more immediate scenario, “price action will continue to reflect Powell’s positioning ahead of his speech at the annual Jackson Hole conference,” said CBA strategist Carol Kong. We expect EUR/USD to trade below much of the week. 1:1.”
A blow to emerging markets
The rapid appreciation of the dollar is even more damaging to emerging markets, whose central banks are consuming the equivalent of more than $2 billion in foreign exchange reserves each working day to prop up their currencies. This year alone, India, Thailand and South Korea have lost a combined $115 billion in foreign exchange reserves.
Emerging market currencies such as the South Korean won, Hungarian forint, Brazilian real and Mexican peso are the most vulnerable as the U.S. Treasury yield curve inverts further, a closely watched sign of a looming recession, TD Securities said. to new lows.
“Rate hikes coupled with a stronger dollar have been putting significant pressure on risk sentiment,” said Alvin Tan, a Singapore-based strategist at RBC Capital Markets. The dollar’s strength “could continue into the second half of this year, or even next year.” the beginning of the year.”
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