Brace for the return of the strong dollar

Photo: iStock
Photo: iStock

Summary

  • The U.S. currency had been on a steady decline since mid-July as investors bet on a slower pace of U.S. rate-increases from the Federal Reserve

The strong dollar is staging a comeback.

The U.S. currency had been on a steady decline since mid-July as investors bet on a slower pace of U.S. rate-increases from the Federal Reserve.

But new worries over slowing economic growth abroad are reviving demand for the U.S. currency. China’s cut to key lending rates provided the latest spark for dollar strength Monday as investors sought safe havens.

The ICE U.S. Dollar Index, which tracks the currency against a basket of peers, rose 0.5% on Monday. The index is still off roughly 2% from its peak on July 14, when it set a 20-year high.

ING economists say the dollar will also be supported by continued rate-increases from the Fed. Central bank officials have indicated recently they aren’t yet convinced that the battle against decades-high U.S. inflation is won. Those comments have cast doubt on expectations for a Fed “pivot" to less aggressive rate increases, which had been a key factor in driving the dollar’s decline since July.

“The reality is that the Fed is likely to stay on track with its tightening," wrote ING economists in a note to clients. “We think the dollar is more likely to retest its highs than correct much lower."

The strong dollar is often described as a “wrecking ball" that can wreak havoc on economies around the world. A sustained rally in the currency would revive pressure on vulnerable developing nations whose U.S. dollar-denominated debts become more expensive to repay. It would also add to inflation pressures for many countries as imports priced in U.S. dollars become more expensive.

 

This story has been published from a wire agency feed without modifications to the text

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