The US dollar is experiencing a powerful surge, demonstrating its best weekly performance since 2022. This impressive rally comes in response to higher-than-anticipated US inflation figures, causing substantial shifts in the global financial markets. Since Monday, the dollar has gained a notable 1.5% against a basket of six major currencies.
Market Reactions: Euro, Sterling, and Yen
The euro and sterling have been significantly affected, with both currencies dropping to their lowest levels against the dollar since November. The euro currently trades at approximately $1.0626, while sterling has fallen to roughly $1.2436. In contrast, the yen experienced an initial slump to a 34-year low, later recovering to around ¥152.86.
Interestingly, sterling’s decline has fueled a rise in UK stocks. The FTSE 100, with constituents generating substantial dollar-denominated revenues, benefited and is now flirting with record highs.
Financial Experts Weigh In
The recent events have elicited insights from market experts worldwide. One of our analysts emphasizes the unique situation in the US, characterized by the interplay of loose fiscal policy and tightened monetary policy. This combination is regarded as a key factor driving the dollar’s current strength. Additionally, the term “divergence” has become prevalent in market discussions, highlighting the widening gap between US monetary policy and the paths taken by other major central banks.
Inflation, Interest Rates, and the Euro
The higher-than-expected US consumer price inflation for March (at 3.5%) has led traders to anticipate a less aggressive approach to interest rate cuts from the Federal Reserve. At the beginning of the year, expectations were for as many as six quarter-point cuts, whereas now, the market consensus has downshifted.
On the other hand, the European Central Bank signaled its continued plans to lower interest rates in June, adding pressure on the euro. Expectations of falling eurozone interest rates, outpacing those in the US, have intensified. As a result, the single currency has experienced its largest weekly decline since September 2022.
Market Perspectives on Divergent Policies
One of our analysts notes that the ECB’s dovish policy stance has contributed to the euro’s weakening against the dollar. This observed divergence in interest rates has prompted an expansion in the spread between US and German 10-year government bonds to its widest point since 2019.
Further, Sweden’s recent lower-than-expected inflation numbers have ignited discussions about a potential interest rate cut by the Riksbank as early as May.
Global Implications of a Strong Dollar
A persistently strong dollar raises potential challenges for countries aiming to lower interest rates. A key concern is the risk of fueling imported inflation as their currencies weaken. One of our analysts emphasizes that in such a scenario, central banks outside the US might find their ability to effectively combat inflation is hindered.
The Yen’s Vulnerability
Among the most affected currencies, the Japanese yen’s descent to a 1990 level has raised concerns within Japan’s finance ministry, triggering discussions about potential interventions. Japanese authorities remain vigilant, stating they are prepared to take measures to counteract excessive exchange rate fluctuations.
Market experts express skepticism about the long-term efficacy of such interventions. One of our analysts points out the Bank of Japan’s continued accommodative policy stance as the primary driver of the yen’s weakness. This substantial policy gap reinforces the yen’s vulnerability in the current environment.
