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As any old school forex trader will tell you: buy dollars, use diamonds. It’s certainly shaping up to be a decent bet this year, in a way that’s causing pockets of stress around the world. But if you’re waiting for a shock-and-awe exercise to turn things around, you’ll probably have to wait a long time.
At first glance, the world’s dominant reserve currency is pretty subdued right now. The DXY dollar The index, which tracks it against a group of other major currencies, is up about 4 percent in 2024, a decent rise but nothing spectacular. The index is still about 7 percent below the all-time high it reached in September 2022.
But for many analysts and investors, that simply gives the dollar room to continue rising as markets recalibrate their expectations for U.S. interest rates. “The dollar still has more to give,” wrote Shahab Jalinoos and Vassili Serebriakov, currency analysts at UBS. Some tensions are already spreading in Asia and emerging markets, and it is not too difficult to imagine them becoming a source of broader volatility in markets later this year.
The reason for all this, of course, is that while it still seems likely that the United States will cut interest rates this year, that won’t be until September at the earliest. And the Federal Reserve is expected to act once or twice if necessary, while other major developed-market central banks are on track to cut much sooner or, in Japan’s case, stuck in a dovish stance. That gap is a classic recipe for dollar strength. In late April, Goldman Sachs said it expected the dollar to be “stronger for longer,” with some “disruptive” elements. The best hope to change that situation is for Friday’s disappointing U.S. jobs data to continue.
The exchange rate against the Japanese yen is the point of greatest tension right now, as demonstrated by what looks very similar to an official intervention by the country’s authorities this week. The yen has been falling fairly steadily since early 2022. It has lost a third of its value since then, leaving the dollar trading at highs not seen since the mid-1980s. But the latest jolt in which The yen surpassed 160 yen per dollar was followed by a rapid recovery.
We won’t know for sure whether this reflected the Bank of Japan’s selling of dollars until reserves data is released in the coming weeks, but market participants have little doubt this is the source. In any case, it didn’t really work. Unilateral interventions rarely achieve this. The dollar retreated to around ¥155, so this is something of a hurdle. But that’s all. If anything, analysts pointed to higher, not lower, targets for the dollar against the yen after this week’s shakeup.
“This is what happens when a central bank adopts completely inappropriate monetary policy,” said Peter Fitzgerald, head of macro and multi-asset investments at Aviva Investors (for the avoidance of doubt, he is referring to the Bank of Japan’s interest rate). of 0 percent, but not that of the United States Federal Reserve, of just over 5 percent).
“The pressure valve is the currency, and the only way to address it is with monetary policy,” Fitzgerald said. The intervention, assuming that has happened, will not change the course, she adds.
Japan is not alone here. He expressed concern to U.S. Treasury Secretary Janet Yellen about the matter last month, along with South Korea. Also in late April, Indonesia’s central bank surprised market participants by raising interest rates in an effort to prop up the rupiah.
Currency weakness outside the United States is not simply bad. It can, for example, help exports. Ironically, Japan spent years over the past two decades trying to drive the yen down, not up. But one-way traffic and rapid declines are more worrying and can fuel inflation by raising the cost of imported goods.
Europe could move towards this treatment. The euro is already hovering around its weakest levels in two decades, at $1.07, largely due to that gap in interest rate profiles. But Barclays is among those warning that steeper declines may be ahead. A second Donald Trump presidency involving new trade tariffs could push the exchange rate toward parity, he argues.
At that point, calls for major authorities to come together and weaken the dollar would almost certainly grow louder. In fact, in his last term in office, Trump himself openly opposed the weakness of the euro. But for now, these all remain hypothetical risks. UBS analysts say the bar for late-1980s-style multilateral intervention – the only kind that works – remains “very high.” A coordinated intervention “was not completely off the table,” the bank wrote, but would require much more pronounced dollar strength and market volatility. It might require “a new external shock sufficiently pressing and comprehensive to make otherwise controversial domestic policy coordination an acceptable option.”
It is difficult to argue that the United States has an urgent need to cut interest rates. Until all that changes, countries feeling the pressure will scream into the void.
katie.martin@ft.com