The dollar is reaching fresh nearly two-year highs, lifted by looming interest-rate increases from the Federal Reserve, strong U.S. growth and geopolitical jitters overseas.
The Wall Street Journal Dollar Index, which measures the U.S. currency against a group of 16 others, has climbed in 13 of 15 sessions to its highest levels since May 2020. The dollar has gained more than 10% versus the Japanese yen this year and more than 5% against the euro. The index slipped 0.6% Wednesday.
This year’s climb brings the dollar back toward levels hit during the pandemic market panic of March 2020, when investors world-wide piled into the currency, causing a global shortage and intervention from the Fed. It boosts profits at companies that import goods from abroad, and the purchasing power of consumers buying from overseas. It also threatens to hurt multinationals by making their products less competitive abroad, while increasing the cost of converting foreign revenues into the U.S. currency.
One major factor lifting the dollar: expectations that U.S. growth will outpace the recovery elsewhere, with the Fed signaling a rapid course of interest-rate increases to tame inflation.
U.S. government bond yields have jumped to multiyear highs as investors brace themselves for the most-aggressive pace of rate increases in more than 15 years. Market-based measures show investors expect the Fed will lift its benchmark federal-funds rate to 3% by year-end, and higher rates tend to attract yield-seeking investors to a currency.
“The dollar typically performs in two extremes: in a scenario of risk aversion, or in a scenario where the U.S. is a clear outperformer,” said Kristen Macleod, co-head of global foreign exchange sales at Barclays. “What we have seen over the past couple of months—since the Russia-Ukraine conflict kicked off—is the dollar is benefiting from a bit of both.”
Russia’s invasion of Ukraine has also buoyed the dollar, sparking a run to safe-haven investments while also threatening growth in Europe. The war is driving up prices in a region that relies heavily on energy imports from Russia, complicating the European Central Bank’s task of tackling inflation while supporting growth. Last week the ECB indicated it would be slower to raise rates, lagging behind the Fed.
Some expect the dollar to lose ground over the next year. They contend that weakness in the stock market and one-off events in Europe—including the French presidential election—have driven the currency’s aggressive gains this month. Some investors are buying derivatives tied to the Japanese yen that amount to bets the dollar has peaked and won’t move past a certain level. They are buying call options known as “reverse knock-outs” that become worthless if the dollar moves much higher.“Many of the trades people are putting on have an air of skepticism that the move will sustain past a certain point,” said Jeff Yarmouth, global co-head of foreign exchange flow derivatives trading at UBS Group.
But unless U.S. economic data falters or the Fed walks back the rate increases it has laid out for financial markets, analysts say the dollar has more room to gain.
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According to Morgan Stanley data that tracks client flows, asset managers and others have bought more dollars versus other currencies, reflecting steady optimism around the currency and the U.S. economy’s prospects.
“We have found investors are increasingly long the dollar and are adding more to the topside,” said David Adams, head of FX strategy at Morgan Stanley. “The key question is what is the global growth outlook versus the U.S. growth outlook over the next six to 12 months.”
Write to Julia-Ambra Verlaine at julia.verlaine@wsj.com
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Appeared in the April 21, 2022, print edition as ‘Dollar’s Climb Reaches Near 2-Year High.’
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