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The dollar's recovery, initiated early in the second quarter, shows little sign of slackening, an unexpected turnaround after the fall of the US dollar during most of last year.
The WSJ Dollar Index, which measures the currency against a basket of 16 others, rose 5.1% in the second quarter and stands near its highest level in a year. The dollar rose 5.5% against the euro and 4.2% against the yen in the second quarter.
Forecasts indicate that the Federal Reserve will increase rates at a faster pace this year in response to strong US economic growth. exceeded growth in Europe and in other regions. Higher rates make the dollar more attractive for investors looking for yield.
The soaring dollar – accompanied by signs that the US economy is strengthening as the growth of other major economies is declining – is helping to attract global investors to US stocks and bonds. US-focused equity funds attracted $ 3.2 billion of inflows in the second quarter, compared with $ 25 billion in European-based cash outflows, according to the report. # 39; EPFR.
But a stronger dollar can hurt the economies of the developing world, making it more difficult for governments and businesses to repay their dollar-denominated debt. Countries with large current account deficits, such as Argentina and Turkey, have suffered sharp currency declines in recent weeks.
The rising dollar may also weigh on commodity prices, most of which are denominated in dollars. to foreign investors when the US currency increases. Copper dropped 2.3% in the second quarter, while gold is nearing its lowest level since the end of 2017 after declining 5.4%
"In the end, the dollar does not like a stronger dollar "Juckes, strategist at Société Générale
Several factors explain the rally of the dollar. Many investors started the year believing that a global recovery would drive an acceleration in US growth to the Eurozone, which experienced its strongest economic expansion in a decade year ago. latest. This growth abroad has penalized the dollar, which fell 0.4% in the fourth quarter.
However, euro area data have been uneven over the last few months, and European Central Bank officials have said they will not wait until summer 2019. In the meantime, Federal Reserve announced an acceleration of rate hikes this year, spurred by stronger growth in the United States.
Expectations that US yields increase while borrowing costs make the dollar more attractive
As US borrowing costs increase, "people are wondering if they really want to investing in risk instruments, or in the US, where they can earn a decent return for much less risk "G-10 FX Strategy at Bank of America Merrill Lynch.
Investors also sought refuge in the dollar amid intensified trade conflict between the United States and China. Many believe that a protracted conflict between the two largest economies in the world will have a greater impact on growth in Europe and Asia.
An escalation of the rhetoric of trade wars would likely accelerate the appreciation of the dollar, especially against the currencies of export-dependent countries Like Canada and Australia, analysts at Bank of America Merrill Lynch have reported in a note to customers
The dollar is up 1.9% against the Canadian dollar and 3.7% against the Australian dollar in the second quarter.
BNP Paribas
it expects the dollar to benefit US companies that repatriate cash from abroad to take advantage of a Republican tax holiday signed in late 2017. The bank estimates that companies have repatriated about $ 160 billion. dollars in the first quarter.
At the same time, the dollar could be vulnerable to easing trade tensions and efforts by the US administration to denigrate currency, they added. A stronger dollar is hurting US companies by making their products more expensive abroad.
Some people think that the dollar's recovery will not last much longer. TD Securities analysts believe that growth will soon recover in Europe and Asia, making the dollar less attractive.
"The best days of the dollar bull market are in the past," says a report from Securities. "If global growth becomes higher in the second half," the report says, "then we think the dollar will suffer."
Standard Bank analysts believe that the strengthening of the dollar will bring the euro down to $ 1.10 a month ahead, about $ 1.17. Over the next year, though, they expect the euro to rise to around $ 1.30 against the dollar, the US budget and trade deficits undermine confidence in the economy. The economy of the country.
Write to Ira Iosebashvili at [email protected]
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