Fed hawkishness paved the way for a soaring dollar that's beating down other currencies. Here's what to know.
Phil Rosen
Updated 5 min read
Friday eve on a short week? "Good morning" goes without saying. Phil Rosen here, writing to you from New York City.
Since money is always top of mind for us markets people, today I wanted to check in on how the U.S. dollar's doing.
Like Jack's beanstalk or thermometers in California, the greenback has shot upwards in a relatively short span of time.
The currency hit its highest level in two decades, and the dollar index has climbed 15% this year.
That puts it on track for its biggest annual leap since 1981.
Let's find out why.
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US dollar
1. As of this week, the dollar is up 13% against the euro, 15% against the British pound, and 20% against Japan's yen, according to Bloomberg data.
Europe's energy crisis, Russia's war on Ukraine, and fears of a global recession have sent traders to the safe-haven dollar.
But perhaps most importantly, we can look to the Fed as the reason for the dramatic surge.
The central bank has hiked interest rates at the most aggressive pace since the 1980s in an attempt to stem high inflation, and at least one more outsized hike could come this month.
The Fed has raised rates by 2.25 percentage points since March, with the target range now standing at between 2.25% and 2.5%.
Yesterday, Fed Reserve Vice Chair Lael Brainard said restrictive policy measures will be in place for "as long as it takes" — meaning no rate cuts anytime soon.
Jan Szilagyi, CEO of investment research firm Toggle AI, told me investors have flocked to the greenback because markets recognize policymakers are behind in their inflation battle.
"The U.S. currency tends to increase in value against other currencies when the U.S. economy is extremely weak — often a time of heightened risk aversion — or very strong," he explained.
It's worth noting that the dollar's strength has prompted particularly aggressive moves from China. It's up 8% against the yuan in 2022.
The dollar's relentless advance has sent China's foreign exchange reserves to the lowest point since 2018, Chinese government data revealed this week, as the value of its other assets declines.
At the same time, the People's Bank of China has moved to shield its currency from further declines as it nears the psychological threshold of 7 per dollar.
It remains to be seen whether policy adjustments can save the falling yuan from the dual pressures of the hawkish Federal Reserve and China's COVID-19 lockdowns.
What do you think other central banks can do to boost their currencies against the dollar? Email prosen@insider.com or tweet @philrosenn.
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