The dollar has been climbing higher this year, and nothing – not even concerns over prospects for the US economy and interest rates – seems adequate to curb it. Last week the dollar index reached its highest close since the summer of 2017 and it is now about 10 percent up from the low it reached in early 2018. However, the currency’s strength appears to be occurring less from an intrinsic conviction in the US currency and more from the vulnerability of its challengers.
The euro is being kept back by weak Eurozone growth; the European Central Bank last week slashed its estimates. Meanwhile, the Bank of Canada has cut its growth forecast and Australia must contend with a deceleration in China, its main trading partner as seen by lower-than-forecast Australian gross domestic product figures last week. The weight of the dollar comes despite the US Federal Reserve’s surprise U-turn at the end of January when it placed more interest rate hikes on standby and said it would be flexible over the extent of its balance sheet.
Moves by other central banks to jettison or defer their intentions to tighten monetary policy are looked at as a reason not to correct the dollar because the Fed ended its rate cycle earlier than supposed. Yet some analysts are still baffled as to why the currency should exchange at such high-cost valuations without the wish for further Fed hikes. Worth monitoring also is the momentum of emerging markets, which have posted vigorous rebounds after last year’s falls. The MSCI Emerging Markets index is up 8 percent this year. As higher dollar makes dollar-denominated debt more expensive to pay off, which could make life troublesome for heavy US-dollar borrowers. Thus a further restraint on emerging markets because of this could yet take place.