US Dollar Is Down, But Not Out, as Fed Prepares for More Rate Hikes

Bloomberg) — The three-day selloff in the US dollar on the back of a global stock rally and just the possibility — yet to materialize — of an end to China’s Covid-zero policy, has caught market players’ attention.

But betting against the greenback at this juncture, they warn, is a bit too soon and a bit too risky.

If anything, they say, it’s hard to see the currency weakening much further from here in the short term after the US Federal Reserve last week stuck to its hawkish stance and signaled that the ultimate level for rates would be higher than previously expected. That, on top of a global slowdown in growth, raises the possibility of other central banks being forced to slow their own pace of rate increases, which in turn may contribute to the weakening of their currencies.

“It’s a doom loop–the weaker the rest of the world, the better the outlook for the dollar,” Jane Foley, a strategist at Rabobank in London, said. “While the stronger the dollar goes, the harder it is on other countries, especially commodity-importing nations.”

As the greenback surged to its highest level in decades earlier this year, other currencies weakened, the yen has been pushed to 30-year lows, while the pound briefly lost about a fifth of its value. The Bank of Japan is one of the few central banks to maintain rock-bottom rates, making it the worst performing currency among G-10 peers this year.

Other countries have already started tapping the brakes on tightening. Canada surprised investors last month by raising its overnight lending rate 50 basis points instead of 75. Last week, the Bank of England pushed back against market expectations for the scale of future increases, saying they were too high and warning that following that path would induce a two-year recession. It did, though, deliver its biggest interest rate increase in 33 years Thursday.

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