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Wednesday, February 1, 2023

Why US Dollar Will Remain Strong Against Naira, Euro, And British Pound For Some Time

The value of the dollar relative to the euro, yen, and other major currencies has increased by more than 14% this year, according to the U.S. dollar index. The increase seems even more significant when compared to other assets, the majority of which have had a bad year.

The persistent dollar shortage in Nigeria, which has long been an issue for companies doing business there, is allegedly at a crisis point, according to currency traders and investors. The naira has dropped to more than N705 on the black market, and there are rumors that it could fall even further.

The British pound hit a 37-year low against the dollar on Friday as new data showed that consumers are reducing their spending as inflation puts a strain on household finances, highlighting concerns that the economy may already be contracting. The euro is at its lowest level against the dollar in two decades.

The job market in the US has remarkably held steady despite rising inflation. In addition, other economic sectors have done well, like the services sector.

Concerns about the housing market slowing down and other economic sectors that profit from low interest rates have decreased as a result of this. In order to stop the worst inflation in 40 years, traders now believe that the Federal Reserve will keep raising interest rates sharply and holding them there for a while.

As a result of these forecasts, the yield on a 10-year Treasury has more than doubled to 3.44% from roughly 1.33% a year ago. Additionally, investors from all over the world are being drawn in by those more alluring U.S. rates.

Major economies appear to be more vulnerable than the United States, and other central banks have been less aggressive than the Fed. The European Central Bank recently increased its key interest rate by the greatest percentage point – three-quarters of a point.


But while expecting a third rate increase this coming week, the Fed has already increased its benchmark rate by as much as twice this year. Following a hotter-than-expected report on U.S. inflation released on Tuesday, some traders even claim a massive increase of a full percentage point may be feasible.

Because of their less aggressive nature, 10-year bonds in Europe and other parts of the world have lower yields than U.S. Treasury bonds, such as Germany’s 1.75% and Japan’s 0.25%. Investors from Asia and Europe have to exchange their own currencies for U.S. dollars when buying Treasury securities. As a result, the dollar’s value increases.

The strong dollar puts a financial strain on developing countries. Many companies and governments in such emerging and frontier markets borrow money in US-dollar terms, instead of in their own currencies. As their currencies weaken, they are increasingly stressed about repaying their debts in U.S. dollars.

Over the past year, emerging-market bonds have also had among the poorest performances in the fixed-income market. Although yields have recently increased dramatically and may offer some chances over the long run, EM bond returns are generally not favoured by the tighter Fed policy, declining global liquidity, and the rising greenback.

The dollar’s biggest moves may be behind it, but many top currency experts expect the dollar to at least stay this high for a while.

U.S. inflation remains more stubborn than expected, according to last Tuesday’s report. As a result, traders are betting that the Fed will hike rates next year. In an effort to break the nation’s high inflation rate, Fed officials have reaffirmed their commitment to keeping rates high until the job is done, even if it damages economic growth, strengthening the dollar as investors seek out the safest asset at the moment.

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