The US Dollar (USD) has been strengthening since the start of 2024 and concluded at 106.26 in April 2024 against six major counterparts. It marked the USD’s peak since early November 2023. The rising USD attracts foreign investors, impacting currency pairs and related markets by diverting interest from other major currencies.
This article will discuss what hopes the USD hitting its 30-year high in 2024 means for other currencies and the markets.
What are the factors behind USD’s 30-year high?
Inflation trends and the Fed’s monetary policy
According to CNN Business reports the US experienced a steady inflation rate of around 3.4% in 2024 and might reach the 2% target soon. This has significantly contributed to the USD reaching a 30-year high. The Federal Reserve's aggressive monetary policy, with interest rate hikes and balance sheet reduction, has made USD assets more attractive due to higher yields.
This tightening policy, coupled with clear communication about inflation control, has bolstered investor confidence and enhanced the perception of economic stability in the US. Additionally, the USD's attractiveness as an investment due to higher returns has driven foreign capital into the country, further increasing demand for the USD.
Positive retail spending data
Positive retail spending data indicates robust consumer confidence and economic activity in the US. Higher consumer spending supports GDP growth, increasing investor confidence in the US economy and strengthening the Dollar.
Personal outlays, which include personal consumption expenditures (PCE), personal interest payments, and personal current transfer payments, rose by $54.3 billion (0.3%). Additionally, consumer spending increased by $43.9 billion (0.2%). Retail sales figures often exceed expectations, reflecting a resilient economy despite inflationary pressures. Retail trade sales in 2024 are up by 2.7% compared to last year. The combined increment has resulted in a rise in USD as well.
Potential for further rate hikes
Market expectations of further rate hikes by the Federal Reserve bolster the Dollar’s strength, driven by persistent inflation. Investors anticipate these hikes, spurring demand for the Dollar as they price in these expectations. Future rate increases would make USD assets more appealing due to higher yields.
The market foresees an interest rate rise at the Bank's June meeting, followed by four more hikes, potentially reaching 5.75%. A projected inflation increase may push rates to 6%, boosting the USD and attracting investors seeking better returns, propelling its value to a 30-year high.
Currencies impacted by USD’s hike
JPY
The Dollar surged against the Japanese Yen (JPY) to its highest level since the mid-1990s in March 2024. The inflation data has pushed back expectations for a rate cut by the Federal Reserve from June to September, prompting a substantial shift in market sentiment. Investors also closely monitored any potential intervention by Japanese authorities to appreciate the Yen amidst its sharp decline.
Despite Japan's historical efforts to stabilize the Yen through currency market interventions, the currency has weakened against the USD with historic lows, reflecting broader trends driven by diverging interest rate policies between the US and Japan.
With US interest rates rising while Japan's remain near zero, investors sought higher returns in Dollar-denominated assets, leading to a significant outflow from the Yen. This trend has been further increased by heightened speculation and increased short positions on the Yen, indicating a bearish outlook for the currency.
AUD
The strength of the US Dollar against many economies, including Australia, has remained notably high, with the USD/AUD exchange rate standing at 1.53 as of January 2024. The Australian Dollar (AUD) tends to appreciate in favorable economic conditions but depreciates during uncertainty, like ongoing global inflation concerns and crises. This trend has recently led to a downward trajectory for the AUD against the USD, exacerbated by market risk sentiment and factors such as interest rate differentials between the US and Australia.
CAD
In Canada’s sectors like cereal production, where the US serves as a dominant importer and exporter, fluctuations in the US Dollar exchange rate have directly affected trade dynamics, potentially altering import and export volumes. Industries such as truck and bus manufacturing have witnessed shifts in competitiveness as the Canadian Dollar (CAD) depreciates against the US Dollar, making domestic goods more attractive to US buyers. Moreover, export-oriented sectors like concrete pipe and block manufacturing gain from a weaker Canadian Dollar, enhancing competitiveness in foreign markets.
Despite forecasts of a rally in 2023, the Canadian Dollar has stalled, leading to a 3.6% decrease in the USD/CAD exchange rate. Looking ahead, uncertainties surrounding the US economy suggest a potential 11.9% increase in the USD/CAD exchange rate in 2024, with an overall forecasted appreciation of 1.9% over the five years to 2024.
CHF
The Swiss Franc (CHF) has sharply declined against the US Dollar, with the USD/CHF pair reaching 0.9000 in early 2024 due to concerns over Swiss economic weakness. Concurrently, the USD has strengthened, buoyed by US economic indicators.
Despite expectations of future interest rate cuts by the US Federal Reserve, the USD maintains relative strength compared to other currencies, with interest rates over 5%. The Swiss National Bank's surprise 25 basis point interest rate cut to 1.50% weakened the Franc, pushing the USD/CHF pair above the 0.9000 threshold.
Navigating the highs and lows of USD
The surge in the US Dollar to a 30-year high in 2024 has reverberated across currency pairs and related markets. The increasing attractiveness of the USD might lead to higher returns for investors with a continued appreciation. However, it might pose risks of destabilizing other currencies and markets, potentially causing economic imbalances and trade disruptions.
