The dollar index achieves a record level and exceeds the peak of 2020
The dollar index rose to an all-time high, past the peak of the Corona pandemic.
The Bloomberg Spot Dollar Index, which measures the US currency against a basket of developed and emerging market currencies, rose 1.2% to 1,304.55 on Thursday, rising to new levels after data showed that US producer prices beat estimates.
The level achieved is higher than the one recorded in March 2020, according to the index that measures the currency's performance since 2005.
The dollar's gains this year have been driven by a combination of interest rate hikes, increased demand for the currency as a safe haven, and recession fears. Thursday's rally was mainly driven by higher short-term yields after higher-than-expected inflation data, as investors boosted bets for a rate hike by the Federal Reserve later this month.
“After the CPI, we are seeing broadening and persistent inflation in the US, which has increased markets' bets on the implied path of US interest rates,” said Simon Harvey, head of FX analysis at Monex Europe.
“This is adding a lot of pressure to global risks for currencies, stocks and returns. Everything is under stress right now, and in this environment it is very difficult for the FX markets to look outside the dollar.” The ICE US Dollar Index, a separate index that compares the dollar to only advanced currencies and has more weight in the euro, has already passed the peak of the epidemic earlier this year and is now approaching its highest level in two decades.
The dollar is equal to the euro for the first time in more than two decades
The euro was equal to the dollar for the first time in more than two decades, today, Wednesday, after the euro zone currency suffered a rapid and significant decline this year.
The 12% drop was the result of multiple pressures, from the war in Ukraine to the energy crisis and the growing risk that Russia would cut gas exports and push the eurozone into recession.
In addition, central banks move at different speeds (to raise interest rates to control inflation), increase the demand for the dollar, and some analysts say that parity between the two currencies may not be the end point, but just a starting point for further decline.
The single currency fell by 0.4% today, Wednesday, and touched $0.9998. The latest drop came after US inflation accelerated more than expected in June, fueling speculation that the Federal Reserve will continue to raise interest rates.
The decline was not accompanied by doubts about the survival of the euro currency, as occurred at the beginning of this century, or when the sovereign debt crisis continued a decade ago. However, falling still remains a problem for the ECB.
It is also a problem for consumers in the €12 trillion economy, fueling rising inflation that is already out of control, with prices rising at a record pace of close to 9%.
imported inflation
Some European Central Bank policy makers have already indicated that they take into account the weakness of the euro, especially when it comes to imported inflation.
Back in May, ECB Governing Council member Francois Villeroy de Gallo said the bank would "watch developments carefully" and that a "too weak" euro would conflict with the price stability objective.
In addition to the double threat of inflation and stagnation, the ECB is also dealing with the risks of a large divergence of sovereign borrowing costs as it reverses the stimulus trajectory. After Italian yields rose last month, the Frankfurt-based central bank began working on a tool to prevent another debt crisis from erupting in the region.
The euro's fall this year is just one chapter in a global story of dollar dominance. Investing in the US currency this year was safe, supported by higher US interest rates, and there was speculation that the rise might prompt monetary policy makers around the world to intervene to weaken it at some point.
At a meeting in Tokyo on Tuesday, US Treasury Secretary Janet Yellen and Japanese Finance Minister Shunichi Suzuki said volatile exchange rates posed a risk, and pledged to consult and cooperate on currency issues. The yen fell to its lowest level against the dollar since 1998.
Monetary policy is also a driving force, given that the European Central Bank has been slow to join the kind of policy tightening that is prevalent elsewhere. At the same time, large interest rate increases by the Federal Reserve have pushed up the dollar, creating a rate differential that will keep pressure on the single currency.
Jordan Rochester, strategist at Nomura International Plc, expects more pain with a drop of as much as 95 US cents. Citigroup believes that the price will fall below this level if Russia cuts gas exports to Europe.
Kate Jukes of Societe Generale SA said earlier this month that the euro would continue to weaken this summer.
The euro is now the currency of 19 countries and about 340 million people, and since its emergence in 1999, it has gone through many ups and downs.
A bout of weakness in its early days pushed the currency below 85 cents to the dollar, and raised questions about its price, economic viability and dire predictions of its demise.
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