At the end of last year, many—including Mark Nash of Jupiter Asset Management—bet that the dollar would weaken as the Fed loosened its policy. And indeed, that scenario played out for the first half of 2023—until July, when dire forecasts about recessions started to lighten up and growth began to falter in Europe and China, fueling a massive rise in the dollar over almost every other major currency, reports an article in Bloomberg. The surprise shift has prompted investors to unwind trades; Nash switched out his bearish position on the dollar by mid-year, saying “The dollar is a beast again,” according to the article.
Global markets have been taken aback by the U.S. economy’s unexpected resiliency, even with the accompanying persistent inflation. A year ago, most economists were predicting a recession by now, and a return to low interest rates in an effort to boost recovery. But as a slowdown in growth occurs overseas, the U.S. economy has churned steadily ahead and investors are moving their cash to U.S. interests on the expectation that the Fed will wind down its rate hikes while managing to keep the economy on track.
Still, the dollar’s resurgence this year hasn’t reached the peaks it hit in 2022, so the fallout isn’t as severe as it was last year. And strategists have no reason to believe it will reverse anytime soon; Kit Juckes of Societe Generale told Bloomberg that the driving force behind the market now is the growth outlook rather than interest rates—a theory that’s backed up by the euro’s recent drop after the European Central Bank raised rates. And while share prices have risen in the U.S., earnings from abroad have dropped; an analysis from Credit Suisse Group AG indicated that for every 8% to 10% bump in the dollar, U.S. companies take a 1% hit in their profits. However, emerging markets will be impacted the most, since imports will become more expensive and inflation more widely felt, forcing central banks to keep interest rates high, the article notes.
Some central banks, such as Japan, are taking action to protect their currencies from weakening, which could include using FX reserves by selling off US Treasuries. It’s unclear what effect that would have on the dollar. And while a possible downturn in the U.S. economy could weaken the currency, there’s little indication that there’s one looming on the horizon—a far cry from last year, when so many managers were betting on one. Says Nash, “The US growth story is just strong and the rest of the world has been weak…[if that growth continues] the dollar will remain firm.”