The title statement may be indicated by what happened yesterday on the US dollar index, when its quotations reached the highest level since 2002. The strength of the dollar in recent times has been tremendous.
Among the world's major currencies, there is currently no other that would gain against the US dollar from the beginning of the year. The Japanese yen, the leader in depreciation, has lost more than 11 percent against the U.S. dollar in that time, followed by the British pound and the euro with losses of about 7.4 percent from January to the end of April. The Swiss franc weakened by about 6 per cent in this period, while the New Zealand dollar fell by about 4.7 per cent. It seems that the Australian and Canadian dollars could lose the least to the USD, thanks to the increase in commodity prices. Here, declines may amount to 1.6 and 0.8 percent, respectively, since the beginning of the year.
Geopolitical uncertainty, fear among some market participants, chances for quick rate hikes in the USA, these could have been the factors that pushed the USD index to the levels of 2002. Currently, the market seems to value the federal funds rate at the end of the year at 2.75-3.0 per cent. Today, the level is 0.25-0.5 per cent. Expectations based on fed funds futures are for a 50 basis point hike in May, a 75 basis point hike in June, 50 basis points in July, 25 basis points in September, 25 basis points in November and 25 basis points in December.
If such a scenario were realized, it would be a huge rate hike in the cost of money in the U.S. and this could become a subject of discussion. As for the necessity of interest rate increases, it seems thatit is difficult to find arguments against here, while the question whether too fast action will not be harmful to the economy remains open. We will find out on 4 May after the Fed's decision on interest rates.
For the US dollar it may also be a kind of test, because it should be remembered that in the markets it is often possible to buy rumours and sell facts, and the 20-year levels of the USD before the start of the real cycle of interest rate rises in the USA may indicate buying those rumours.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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