The US dollar has experienced an incredible return, posting its longest winning streak in almost ten years.
As we examine the specifics, it becomes clear that the dollar has been outperforming a basket of major currencies for an outstanding eight weeks, a record that has not been accomplished since the winter of 2014–2015. It has increased significantly over this time by 5%, with growth beginning in mid-July.
This rebound contrasts sharply with months of unpredictability and volatility that were sparked by worries that the dollar would lose its cherished position as the world’s reserve currency. Recent events, such as the BRICS group’s expansion to include significant oil producers like Saudi Arabia, have fueled conjecture about a global move away from the US currency.
Expert Opinion on the US Dollar
Investment director at Abrdn James Athey stressed that “rumors of the US dollar’s demise continue to be greatly exaggerated.” The comeback of the US Dollar Index, which is currently at its highest level in six months, is consistent with this sentiment.
Numerous encouraging economic reports that have come out of the US in recent weeks are to blame for the US dollar’s recovery. These encouraging signs have raised hopes that the Federal Reserve will keep interest rates higher for a long time. More foreign capital has been flooding into the US economy as a result of this expectation of higher returns, which has raised the value of the US dollar.
A Story of Differing Economies
The economies of China and Europe, on the other hand, are shrouded in uncertainty. According to Athey, “The US economy continues to demonstrate remarkable strength, while matters in China and Europe seem to be descending into a much more recessionary place.”
The resilient nature of the US economy is demonstrated by its almost record-low unemployment rate, active hiring, and rising earnings after accounting for inflation. These elements have led many economists to upgrade their growth predictions, increasing the likelihood of a “soft landing.”
“[The US economy] seems to be more resilient than feared,” according to Carsten Brzeski, global head of macroeconomic research at ING, giving American consumers the assurance to maintain their spending patterns.
Factors Supporting the Dollar’s Resurrection
The significant disparity in interest rates between the US and Europe, according to Russ Mould, investment director at AJ Bell, is a key driver of the dollar’s rebound.
China and Europe, on the other hand, encounter numerous economic difficulties. Europe is concerned about stagflation, which is characterized by high inflation and slow development, and the euro has declined sharply.
Germany’s industrial output has declined for three months in a row, contributing to the continent’s economic problems.
The weakening of the euro is anticipated to boost import costs and possibly drive up inflation. Rising crude oil prices brought on the supply restraints imposed by Saudi Arabia and Russia add to this pressure.
Falling consumer prices, a worsening real estate crisis, and dwindling exports are a few of China’s economic difficulties. To increase demand for borrowing, the People’s Bank of China has responded by lowering interest rates.
According to Alex Cohen, senior FX analyst at Bank of America Global Research, China’s economic problems have not only had an impact on the yuan but also on other local currencies and trading partners, such as the euro.
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