How Strong Dollar can be problem for investors
2023.03.01 04:15
How Strong Dollar can be problem for investors
By Kristina Sobol
Budrigannews.com – After the recent volatility in global financial markets, investors are looking at another potential concern: a stronger dollar.
Due to bets that the Federal Reserve will need to raise rates at a higher rate than many investors had anticipated in order to control inflation, the dollar has gained nearly 4% from its most recent lows and is now close to a seven-week high against a basket of other major currencies.
The value of the US dollar is still approximately 8% below the twenty-year high it reached last year. However, its resurgence and an increase in Treasury yields have already hampered the prospects of a variety of trades that performed well during the fall of the dollar in the second half of 2022.
The Currency Index and MSCI’s emerging market stocks index have both fallen 3% from their January highs, respectively.
After having gained approximately 20% since the end of September, a rally in European stocks has also stalled, with the Index remaining nearly flat for the past three weeks. After giving up a gain of 7%, gold is now trading flat year to date.
According to Lauren Goodwin, an economist and portfolio strategist at New York Life Investments, “a stronger dollar poses a problem for risk assets.”
The impact of the dollar’s fluctuations is widespread as a result of its central position in the global financial system.
The Bank for International Settlements stated in a November report that a stronger dollar tends to tighten global financial conditions, decrease risk-taking appetite, and weaken global trade. Additionally, it makes it more challenging for countries that borrowed in U.S. dollars to pay back their debts, a problem that is frequently felt most acutely by emerging market economies.
According to Bailard’s chief investment officer Eric Leve, “the tailwind behind foreign currencies from a more dovish Fed is generally off the table.”
Gold and other commodities denominated in dollars are also more expensive for foreign buyers when the dollar is stronger. Analysts at UBS Global Wealth Management wrote in the latter part of February that the rise of the dollar could account for some of the 2% decline in the year to date. Later in the year, they anticipate that China’s reopening and supply disruptions caused by Russia will overcome the influence of the US currency and boost oil prices.
The strong dollar hurts exports for the United States and multinational corporations by making it more expensive for them to convert earnings from other countries into their own currency.
NYSE: Morgan Stanley Citing the currency’s relationship to global liquidity conditions, analysts led by chief U.S. equity strategist Michael Wilson wrote on Monday that the direction of the dollar could be a key factor for the near-term trajectory of U.S. stocks. The is still up 3.6% year-to-date despite being down nearly 5% from recent highs.
They wrote, “We think these key support levels for stocks will quickly give way as the bear (market) resumes more forcefully if rates and the U.S. dollar continue to rise.”
Investors’ perceptions of how much higher the Fed will need to raise interest rates will, in part, determine whether the dollar’s recovery continues. When Fed Chairman Jerome Powell gives his semiannual monetary policy testimony to the Senate Banking Committee next week and the United States releases employment data for February, it may provide some insight into the thinking of policymakers as well as the strength of the economy.
Robeco asset manager Colin Graham, head of multi-asset solutions, said he would likely place bets against the U.S. currency if it rose to 106 from its current level of 104. Graham believes the dollar will not rise much further.
He stated that if the price reached the September highs of 114, he would abandon his optimistic outlook for emerging markets.
Thornburg Investment Management’s portfolio manager Emily Leveille sees any weakness in emerging markets as a buying opportunity and is skeptical that the dollar’s recovery will continue.
Leveille stated, “A great time to step in and build positions in high-quality companies can be an emerging market currency weakness.”
On the other hand, analysts at Capital Economics believe that investors will flock to the dollar, a popular destination during uncertain times, and push the currency back to its highs later this year due to an anticipated slowdown in global growth and a decrease in risk appetite.
They stated in their writing, “We expect risk sentiment to deteriorate amid this weakening global backdrop and’safe-haven’ demand to push the dollar higher over the next couple of quarters.”
