The dollar is rapidly rising for the second day in a row and has renewed record values for almost a year.
The dollar index, which reflects the rate against six key world currencies, jumped 0.56% on Wednesday and reached 94.3 points – the highest since November last year.
The Euro against the US dollar also broke through the 11-month bottom, and at 1.1600, lost 0.62% yesterday and 1.7% since the beginning of the month.
The British pound is down 0.8%, to lows since December last year, and the Japanese yen has been at a record low since February 2020.
The dollar, which sagged last year after the launch of the Fed’s printing press, is returning to power, even though the US Central Bank continues to pour $ 120 billion into the markets every month.
Although the Federal Reserve is in the previous regime through the issue of money to buy government bonds and mortgage bonds, the markets are showing signs of a shortage of dollar liquidity.
Reuters notes that currency swap rates, reflecting the cost of dollar loans outside the US, jumped unexpectedly and peaked since December 2020.
Banks and corporations use swaps to borrow dollars against other currencies. And the dynamics of the cross-currency basis – the percentage difference in raising funds – show the preferences of investors: the more negative the basis becomes, the higher the premium foreign banks are willing to pay for dollar liquidity.
The market is preparing for a massive withdrawal of dollar liquidity, which will begin in the coming weeks after the US Congress once again raises the ceiling on government debt, says Valentin Marinov, head of FX strategy at Credit Agricole.
The limit on new loans came into force on August 1, and from that date, the US Treasury cannot carry out new loans: it only refinances bonds and actively spends reserves in the Fed’s accounts. But they are coming to an end. According to the head of the department, Janet Yellen will be completely exhausted by October 18.
“Soap opera” with an increase in the debt ceiling closer to the finale, as soon as it takes place, the US Treasury will sharply increase loans to compensate for the period of temporary pause and restoring cash reserves: as a result, markets will see the “tsunami” of new debt in the amount of about $700 billion, estimates Nordea analyst Sarah Simon Strom.
The US budget will work as a “vacuum cleaner,” drawing liquidity from the markets. Moreover, this will likely happen almost simultaneously with the reduction of infusions from the Fed, Marinov points out.
The Fed is expected to announce a cutback to its QE program in November. However, the head of the regulator Jerome Powell did not rule out that the phasing out will take place quickly – until mid-2022.
“The combined effect of these two factors will be to pump out excess dollar liquidity,” which will support the dollar itself, warns Marinov.
First of all, the currencies of developing countries, dependent on capital flows and speculators playing in carry-trade, may suffer, Nordea believes.
The ruble is stoically bearing the strengthening of the dollar, unlike, for example, the Brazilian real, which fell to its lowest in a month, or the South African rand, which is depreciating in the price for the third week in a row. Moreover, in September, the ruble became the only one out of 24 EM currencies that managed, albeit symbolically, to strengthen – by 0.5% against the dollar.