The dollar index, which compares the US currency to a basket of currencies, rallied sharply at the beginning of Monday and briefly hit 110.2 points, its highest level since June 2002. Then, throughout the day, it had a slight decline and stabilized at 109.77 points. On the other hand, the euro touched its lowest level in 20 years, and the yuan marked a new low in two years. Consequently, so far in 2022, the dollar index has advanced 14 points, which represents an appreciation of the currency of around 11%.
From Grupo Bull Market, they pointed out: “The Fed’s more restrictive monetary policy due to inflationary fears contributes to the dollar continuing to strengthen globally. In turn, the relative performance of other major economies against whose currencies the dollar is measured also affects the calculation. For example, the Euro zone or Japan, with weaker economies than the American one, have less capacity to raise rates and that causes their currencies to depreciate against the dollar. Something similar happens with the Yuan in China, as a result of the economic slowdown”.
Mauro Cognetta, managing partner of Global Focus Investments, highlighted that the dollar is 53% above the low of March 2008. “The Fed is on a path of increasing its interest rate at a faster rate than all the banks of developed countries. . Thus, in the long term, the movement of currencies depends on the imbalance of the interest rates of the different countries. Logically, when a country begins to pay a higher interest rate, in this case the US, because it wants to lower inflation and cool down the economy, it makes capital borrowed from countries with low rates, such as Japan, carry trade and invest in countries with higher rates, mainly a country like the US that has greater legal certainty”.
Along these lines, the yield on US two-year Treasury bonds reached its highest level in 15 years at the end of August. The 10-year bond was in strong demand, which was reflected in the rise in price and the fall in yield, which is still high. Consequently, 2022 continues to be a bad year for emerging countries, given that the strengthening of the dollar continues global risk aversion and weakens the currencies of these countries.
In this sense, Cognetta highlighted: “The first consequence of a strong dollar is the depreciation of emerging currencies. If we look at the trajectory of the CCL dollar with the Brazilian real, since 2011, the period in which the strengthening of the dollar began and that it moved away from its lows in 2008, we see that these emerging currencies depreciated”. As a second consequence, Cognetta points out that “the dollar has an inverse relationship, in the long term, with the price of commodities, so we can expect that these are worth less measured in dollars.” This would have a direct impact on commodity producing countries, such as Argentina.
From Grupo Bull Market, they agree on the analysis, although they clarify: “In the particular case of Argentina, not only the relationship with the dollar matters but also with the real, since the development of the presidential election in Brazil will also have great relevance” .
Source: Ambito
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