DXY daily chart
The dollar is also ahead of most of its G10 peers and all Asian currencies year-to-date.
Why was the dollar so strong?
Here are 3 reasons:
1) The Fed is raising interest rates
A country’s currency tends to rise in line with its interest rates.
Last week, the US Federal Reserve raised interest rates by 25 basis points for the first time since December 2018.
More importantly, the Fed has indicated it could hike rates six more times for the rest of this year, even citing the possibility of a 50 basis point hike in May. That would be like firing two bullets with a single shot.
As markets anticipate these higher interest rates, this has also propelled the US dollar higher.
2) Economic resilience
Despite rising interest rates (which typically translates into slower economic growth), the US economy is expected to fare better than its big rivals, namely the European Union (which is raging an all-out war in the East) and the United Kingdom. For example, the US is less dependent on Russia for oil and natural gas compared to the EU and the UK.
The Bank of England is already beginning to throw cold water on how much it could raise interest rates, sounding rather “dovish” after its monetary policy meeting earlier this month.
The European Central Bank is pushing ahead with plans to hike interest rates, but markets question how much the ECB can hike given the potential fallout of its worst security crisis since World War II.
Given that the Euro and British Pound make up almost 70% of the DXY, the relative outperformance of the US economy compared to the EU and UK should provide good support to the DXY.
3) Demand for Safe Havens
The US dollar is seen as an asset that can protect investors’ fortunes when markets face heightened fears. In times of great uncertainty, such as we are now seeing in the Russia-Ukraine war, the US dollar welcomes investors far and wide with open arms.
After all, the greenback is the world’s reserve currency, is used primarily in cross-border transactions, and is the currency of the world’s largest economy.
Stronger currencies than the US dollar
However, everything I just said does not mean that the US dollar will rise against any single currency.
In fact, the US dollar has weakened against these four currencies in the G10 region so far in 2022:
Australian Dollar (AUD): 3.2%
Norwegian Krone (NOK): 2.5%
New Zealand Dollar (NZD): 1.9%
Canadian Dollar (CAD): 0.7%
(Percentages reflect year-to-date currency performance against the US Dollar)
And here are two main reasons why the currencies listed above have appreciated against the greenback:
- Their central banks have also hiked rates, with the exception of the Reserve Bank of Australia, for now. More influential is the fact that markets believe these central banks are poised to hike rates even further to stem raging inflation.
- These economies depend on raw materials.
With commodity prices rising in recent months, companies in these countries can make more money along with governments.
More money flowing into his economy = more demand for his currency = currency strength
The same is true for currencies like the Brazilian real, which has been the best-performing emerging market currency against the US dollar so far this year.
Overall, the US dollar is expected to maintain its strong position throughout 2022 and possibly beyond.
Although, as discussed above, not all currencies are created equal, this means that there are a number of currencies that are yet to outperform the ‘king dollar’ this year.
For an overview of all of today’s economic events, check out our economic calendar.
By Han Tan Chief Market Analyst at Exinity Group
Disclaimer: The content of this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer and/or solicitation of transactions in financial instruments and/or a guarantee and/or prediction of future performance . ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data provided and shall not be liable for any loss arising out of any reliance thereon investments result .