The U.S. dollar has crushed many rivals this year, including the Japanese yen, the euro and the Chinese yuan, and foreign exchange experts say the dollar’s strength will not wane in the near future.
The Federal Reserve is the main driver behind the dollar’s jump, with policymakers attacking red-hot inflation with big interest rate hikes to slow economic activity. The Fed’s fifth rate hike this year is expected on Wednesday, pushing the Fed funds rate up from a range of 2.25%-2.5%.
While the Fed is in the spotlight, investors’ views on the economy’s competitive strength may serve as a medium-term driver for currencies, said Marc Chandler, managing director of Bannockburn Global Forex. Shifts in the global trade environment and growth concerns are contributing to the weakness among the dollar’s rivals. The US dollar index climbed to 20-year highs and is up 14% this year.
Here’s a look at what’s pushing the yen, euro and Chinese yuan.
The yen has fallen a whopping 24% against the dollar in 2022. The dollar recently rose above 145 yen for the first time in 24 years. Yen trade was “fascinating” with the Bank of Japan’s commitment to buy bonds to keep its 10-year yield capped at 0.25%, Edward Moya, chief market analyst at Oanda, told Insider.
Since 2016, the BOJ has revised its yield curve to increase inflation. The Fed’s aggressive campaign has pushed the yield on the 10-year US Treasury note to nearly 3.5%, making the bonds more attractive relative to Japan and weighing on the value of the yen.
“The Japanese economy is trying to generate inflation … and now we may be seeing inflation with wage growth that could prompt the Bank of Japan to change policy next year,” Moya said.
The BOJ’s next policy statement is due on Thursday. Bank of America sees “no movement” on yield curve control despite global central banks (excluding China) raising interest rates. BofA expects the dollar to rise to 150 yen due to “rate differentials, depreciation concerns and capital flight.”
Meanwhile, the world’s third-largest economy is experiencing a negative terms-of-trade shock, Chandler said.
“Japan imports most of its food and energy. Food and energy prices have risen much faster than.” [those of its] manufactured goods. So Japan, like Europe, has swung from trade surpluses to trade deficits,” he said, pointing to another factor hurting the yen.
The eurozone’s shared currency has lost 13% against the dollar this year, falling below parity for the first time since 2002, with further declines possible. Barclays has a forecast of $0.9800 for the fourth quarter of 2022 and the first quarter of 2023. It was trading at $0.9950 on Friday.
Russia’s curbs on gas flows to Europe have sent gas and electricity prices soaring and forced the European Union to scramble to stockpile gas ahead of winter.
“The eurozone economy is so weak and prices are rising, which is causing an economic slowdown. People are struggling to make ends meet,” Fawad Razaqzada, market analyst at Forex.com, told Insider. “It has increased input costs for businesses in terms of energy. However, sentiment towards the euro is relatively weak [European Central Bank] raises interest rates because of their mandate to control prices.” Inflation in the eurozone reached a record 9.1% in August.
Europe’s energy crisis may not be fully factored into the euro until the winter season, as it will then be clearer whether or not the region has enough energy supplies, Moya said. “A lot of it will depend on the weather. Europe looks vulnerable … and that will be difficult for the euro for the rest of the year.”
The yuan fell to a two-year low against the dollar this week, with the greenback rising above 7 yuan to the dollar. The Chinese currency has lost nearly 10% this year. The People’s Bank of China has worked in part to provide upside support in recent weeks by fixing the currency’s daily rate above market expectations as it prepares for another Fed rate hike.
Economic data on Friday included August retail sales and industrial production beating expectations, but the yuan fell.
“The Chinese economy is struggling, make no mistake about it,” Razaqzada said. “Its zero COVID policy is weakening the momentum the economy is gaining in terms of growth. As long as this policy remains in place, it is very difficult to find a way out for the yuan.” He sees the dollar rising to 7.20 to the yuan soon.
Friday’s data also showed sales and prices falling in China’s real estate sector, an important engine of growth for the world’s second-largest economy.
“His coffers crashed,” Chandler said of the real estate market before the dates. “What is the next development model and how can you minimize the damage?” are issues China must address, he said.