Arriving at his office in the heart of Sydney, Nick Tweedale is greeted by an endless array of dollar bills.
“This is the simplest forex strategy,” claims a trader and CEO of Asia Pacific brokerage FP Markets. “Unless there is a dramatic shift in fundamentals and rhetoric from the Fed, selling the dollar is stupid.”
The dollar’s recovery will accompany sharp falls in almost all major currencies as aggressive Fed sentiment and the looming global recession force investors to buy defensive assets. The euro has slipped below parity, South Korean authorities are already verbally intervening to halt the win from a fresh 13-year low, and the yen has dashed bulls’ hopes by returning to a key 140 level.
The dollar’s rally doesn’t seem to end, and if Fed Chair Jerome Powell makes aggressive comments at this week’s Jackson Hole symposium, the currency will get a fresh boost.
“The dollar’s smile hasn’t gone away,” wrote Wing Ting, chief global currency strategist at Brown Brothers Harriman & Co., referring to the theory that the US currency has weakened during both US and economic dominance downturn gains in value. As risk aversion eases, the dollar will strengthen, given the relatively strong US economic outlook and Fed interest rate expectations.
The dollar has many potential drivers on both sides of the smile. One of them is problems in other regions, from Europe with a falling euro to Japan with a falling yen.
According to the latest data from the Commodity Futures Trading Commission, hedge funds have already increased their bearish bets on the pound. According to the Commodity Futures Trading Commission, they have reached their maximum since March 2020. Money managers also added short yen positions.
According to Bloomberg data, JPMorgan Chase & Co. has the most bearish outlook on the euro. The bank expects the single currency to fall to $0.95 by the end of the year. RBC Capital Markets believes the pound will fall 5% to $1.11. The Commonwealth Bank of Australia is betting on the Australian dollar, falling to 65 cents.
In the near term, price action will reflect Powell’s positioning ahead of Jackson Hole’s performance, CBA strategists said. “We expect EUR/USD to trade below par for most of the week.”
Source of the problem
The soaring dollar is particularly damaging in emerging markets, where central banks collectively burn more than $2 billion in reserves every weekend to prop up their currencies.
India, Thailand, and South Korea have seen their reserves fall sharply. They’ve lost a total of $115 billion this year alone. The Chinese yuan, seen by many as an indicator of emerging markets and foreign exchange, slipped to a key level of 7 yuan to the dollar as Covid restrictions hit the economy.
The US yield curve is inverting – a clear signal of an imminent recession – in these conditions developing world currencies, including the Hungarian forint, Brazilian real, and Mexican peso, are the most vulnerable. “The combination of high-interest rates and a strong US dollar is putting significant pressure on risk appetite,” said Alvin Tan, strategist at RBC Capital Markets in Singapore. The dollar will continue to gain strength through the end of the year and possibly early next year.