NEW YORK - A cocktail of global growth fears, Federal Reserve hawkishness and euro weakness has boosted the US dollar to its highest level in nearly 20 years, and some investors are betting there will be more gains ahead.
The dollar index, which measures the dollar against six major currencies, is up 12% against a basket of its peers in 2022 and is on track for its best year since 2014. The measure has a gain of 7 out of the last 10 years.
Multiple factors are driving the dollar's gains. Investors believe the Federal ReserveFederal Reserve will continue to raise interest rates more aggressively than other central banks, as it faces the worst U.S. inflation in decades, making the dollar more attractive to yield-seeking investors.
At the same time, analysts worry that monetary tightening by the Fed and other central banks could cause the global economy to go into a recession. Other market participants are holding dollars because they believe that the United States will weather a looming global downturn better than other countries.
The dollar has gone up against every G 10 peer, with the Japanese yen feeling the most pain as the Bank of Japan bucks the wave of monetary tightening among global central banks.
The euro has dropped to a two-decade low and close to parity with the dollar because of the rising global recession risks and rising European gas prices.
If the Fed is still hiking rates even as Europe and the United States fall into a recession, the euro could fall to as low as 0.95 against the dollar, down about 7% from its current level, according to George Saravelos, Deutsche Bank spokesman.
He said that we are not yet willing to go that far, but there has been a deterioration in the global and euro-specific growth outlook over the last two weeks, which in our view justifies the dollar rally.
Kit Juckes, head of FX strategy at Societete Generale, believes that the dollar may benefit from a global recession.
He wrote earlier this week that the recession is global and unaffected by the U.S. data. We expect European data to be weak if the U.S. data is weak. The dollar tends to rise in the months leading up to the first hike in hiking cycles, before it falls as a result of rate hikes.
So far, the dollar has shown little signs of slowing down. The dollar index has gone up 8% since the Fed raised rates on March 16, its first hike since December 2018.
A strong dollar could help the Fed fight inflation by making imports cheaper. At the same time, it makes U.S. exporters less competitive abroad, while pressuring the bottom line of U.S. companies that need to convert their foreign profits into dollars.
Microsoft Corp. cut its fourth quarter forecast for profit and revenue in June, joining a number of U.S. companies warning of a weak dollar in the U.S.
The dollar's strength has been accompanied by a rise in currency market volatility as traders try to keep pace with the changing global interest rate environment. The Deutsche Bank Currency Volatility Index, which measures expectations for gyrations in FX markets, was last at 11.09, its highest since March 2020. There have been 25 days this year when the dollar has gone up by 0.5% or more, the most for any comparable period since 2015.
International Monetary Market speculators believe that there will be further gains for the dollar, with net bullish bets on the U.S. dollar at $13.62 billion. The Speculators have been bullish on the dollar for a long time, the longest streak since March 2020, according to the latest data from the U.S. Commodity Futures Trading Commission.