What Explains the Dollar’s Highest Gain in 12 Years and Largest One-Month Drop?
What Explains the Dollar’s Highest Gain in 12 Years and Largest One-Month Drop?
In the first 10 months of 2022, the US dollar index accumulated a gain of 16 points, representing the largest increase since 1985.
Reasons for the rise in the US dollar
Economic analysts attribute the appreciation of the US dollar against other major currencies to a number of reasons, the most important of which are as follows:
· The Federal Reserve (the central bank of the United States) has decided to keep raising interest rates at a faster pace than other major countries to curb inflation, while it is expected that the United States will continue to raise interest rates and this move may further increase the value of the US dollar.
· The risk of a global recession is high, especially in Europe and Asia, and in such a situation the US dollar is seen as a safe haven. Against this backdrop, funds began to flow out of both European and Asian stock markets.
· The demand to invest in the US dollar as a hedge against market volatility and as a response to the crisis until the value of the national currency returns to normal levels or begins to rise.
· Investors are pulling money out of the world economy and putting it into US assets to exploit their rising interest rates.
· According to Russian media reports, the Russian central bank has frozen nearly half of its gold and foreign exchange reserves in almost all Western countries, undermining confidence in the Euro, Swiss Franc and Pound Sterling.
It was expected that the US dollar would continue to rise in this trend, but a month after its rise, a change occurred and as of 30 November, the US dollar index fell by 4.94% in November, the largest one-month drop since September 2010 when it fell by 5.39%.
Reasons for the fall of the US dollar
Nick Timiraos, a reporter for the Wall Street Journal known as the “New FED News Service” or “FED sounding board”, said that the October inflation report could keep the FED on track to raise rates by 50 basis points next month; officials have hinted that they are somewhat insensitive to recent inflation data and want to slow the pace of rate hikes. Nick Timiraos has often “dramatized” the FED’s attitude through his views or comments since the FED started its current rate hike cycle.
Harker, the President of the FED of Philadelphia, believes that the FED is getting closer to pausing interest rate hikes, and that he would prefer to “pause” when the federal funds rate reaches about 4.5% to see the impact of monetary policy on the economy and then consider whether to continue tightening based on actual conditions.
Logan, the President of the FED of Dallas, stated that the FED “may soon appropriately slow the pace of rate increases” to allow for a better assessment of changes in financial and economic conditions.
While uncertainty may drive the US dollar higher in the short term, a more common view is that it will weaken sometime in 2023. Ross believes that it is “inevitable that the dollar will give back its gains one day” and believes that it is overvalued and “difficult to maintain at current levels”. Still, for now, investors should be prepared for short-term fluctuations in the US dollar's exchange rate.
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