Don’t count the dollar out
A weaker dollar is good news for the global economy, says Gene Frieda for Project Syndicate. Last year the greenback surged to 20-year highs against other major currencies. Its rally was powered by aggressive interest-rate hikes in America (which increased the yields available on dollardenominated assets, prompting investors to buy) and demand for a safe-haven as markets sought a refuge from fears about “inflation and uncontained military conflict”.
Many of those factors should reverse in the year ahead. “As inflation recedes… uncertainty will fall, and so, too, should the dollar.” That will bring some “muchneeded financial relief to emerging-market economies”, many of which live at the whim of the dollar debt markets.
Yet the greenback could surprise investors on the upside this year, says
The Economist. The case for a reversal of safe-haven flows rests on shaky assumptions about “the progress of an unpredictable war”. America’s Federal Reserve continues to insist that more rate rises are needed to tame inflation; if it follows through there could be another leg for the dollar rally.
Traders will crowd back into the greenback if the US economy outperforms other countries this year, but if the US slumps, then investors will also buy up the greenback to take refuge.
Some also think that the predicted fracturing of the world into distinct trading blocs will unseat the dollar, says Marcus Ashworth on Bloomberg. Yet it is hard to see how any competitor can supplant the “familiarity and scale” of the US currency. Around 40% of global trade is invoiced in dollars and the currency has a 42% share of volumes on the Swift interbank network. The yuan, supposedly the greenback’s big geopolitical rival, accounts for just 2%.