(BFM-Börse) – The greenback continues to gain ground against other currencies, especially against the euro. But other currencies, notably the Brazilian real or the Swiss franc, are doing much better against the dollar.
King Dollar has rarely been so imperial. Buoyed by its safe haven status and expectations of monetary tightening by the Federal Reserve (Fed), the greenback has posted significant gains against many other major currencies since the start of 2022.
The US Dollar Index (DXY), an index that tracks the dollar’s performance against a basket of other currencies such as the euro (which has the largest weight in the basket at 57.6%), the yen, the pound or the Swiss franc measures , is up nearly 14% year-to-date.
The strength of the greenback, which penalizes certain commodities like oil, has been particularly evident against the euro, which fell back below par this summer and is struggling to stay above it. The European currency is suffering from recession fears on the old continent against the background of rising electricity and gas prices. UBS Bank does not expect a trend reversal. The Swiss establishment recently updated their forecasts, expecting a euro at $0.96 in December, which would then remain below $1 through June 2023.
Aside from rising 13.8% against the euro, the dollar also made significant gains against the pound sterling (+17%), the Norwegian krone (+13.8%) or the yen (+22%), the 24- reached yearly lows.
The Brazilian real and the peso stronger than the dollar
However, some currencies are resisting. Among emerging market currencies, the dollar even lost against the Brazilian real (-5.9%) and the Mexican peso (-1.8%).
“The Brazilian real and Mexican peso showed surprising resilience against the rising dollar, likely helped by high interest rates in Brazil and Mexico and less worrisome economic prospects than their neighbors,” stresses UBS.
The Brazilian real is benefiting from the impressive tightening of monetary policy by the Banco Central do Brasil, Brazil’s central bank. “The institution has been extremely proactive in fighting inflation. In August, it raised its key interest rate for the twelfth time in a row [le Selic, NDLR] at 13.75%,” points out John Plassard, director and investment specialist at Mirabaud.
Inflation (albeit still high) is slowing, which is also benefiting the currency, the expert adds. In July, price increases remained limited to 10% over a year and even declined over a month. The sharp rise in oil prices has also supported the Brazilian real as Brazil is the eighth largest producing country according to the US Department of Energy.
The Mexican peso is also benefiting from the interest rate hike, which the Bank of Mexico lifted to a record 8.5% two weeks ago. The Mexican government has also pursued prudent fiscal policy, defying calls for stimulus even at the height of the pandemic.
As Bloomberg points out, Mexico’s currency is also being fueled by industrial relocations, with American companies repatriating some of their Asian manufacturing units to Mexico due to wage increases in China, the country’s zero-Covid policy (which causes significant production disruptions) and has increased transportation costs. This leads to investment and an improvement in the country’s balance of payments. “Mexico has started to regain the competitive advantages it lost decades ago,” Hari Hariharan, managing director of hedge fund NWI Management, told Bloomberg in New York.
Switzerland and its ultra-resilient economy
Beyond emerging market currencies, certain developed market currencies lost little ground against the greenback. The US dollar is up just 4% year-to-date against its Canadian counterpart at CAD$1.3147. Again, the country’s lime leaf-backed currency was backed by a Bank of Canada, which “ultra-proactively and quickly raised its key interest rate,” raising it to 2.5% in mid-July, points out John Plassard.
Inflation remains in check and stood at 7.6% in July, a significant slowdown from 8.1% in June. Rising oil prices – Canada is the fourth largest producer in the world – are also affecting the currency’s attractiveness. According to UBS, the Canadian dollar has clear appreciation potential; the Swiss bank expects a rate of 1 US dollar for 1.24 Canadian dollars in June 2023.
The Swiss franc also holds its place. The US dollar only gained 7.5% against the Swiss currency. “In June, the Swiss National Bank (SNB, the Swiss central bank) decided to stop intervening to prevent the Swiss franc from appreciating, as this appreciation is a bulwark against inflation and the cheapening of imported product prices,” recalls John plassard.
“Inflation is under control at 3.4% over a year [en juillet et juin NDLR]full employment is maintained and Swiss export companies are posting good results despite the expensive Swiss franc,” he adds.
The dollar also posted relatively modest gains against the Australian dollar, up 6.7% since early January. Australia is benefiting from a robust economy, with the IMF expecting growth of 3.8% this year and 2.2% next year.
“Key factors include Australia’s record trade balance due to high energy prices [et des métaux NDLR]a resilient domestic economy and signs that China is poised to step up its stimulus measures, which has supported the actions of the major miners,” said UBS.
[Note : les cours de change ont été arrêtés vendredi en fin de matinée]
Julien Marion – ©2022 BFM Stock Exchange
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