The ICE US Dollar Index rose 0.9% to hit the highest level since 2002, surpassing its 2017 high, before tapering higher. The Fed is raising rates to control rising inflation, boosting US yields. The dollar is also receiving support as the spread of the coronavirus in China, as well as the fallout from the Russian invasion of Ukraine, threaten an economic slowdown, increasing demand for investment havens.
“The US dollar provides a hedge against a significant deterioration in global growth, and is a highly positive carry, particularly against the euro,” Citigroup strategists including Yasmin Younes said. “The US remains well insulated from downside risks around Russia-Ukraine.”
The move is being fueled by weakness in the dollar’s major crosses, with the yen sinking to a 20-year low and euro weakness putting parity against the dollar on sight. Yields on US Treasury bonds have led a global rise in recent months.
For its part, the Bloomberg Dollar Spot index remains below its highs from the beginning of the pandemic at the highest point since 2020. The ICE index has a greater weight in the euro, while the Bloomberg indicator uses a basket of 10 currencies reviewed annually, including emerging markets like the Mexican peso. That suggests the current bout of dollar strength is not as broad as it was during the height of the coronavirus panic.
Still, the Bloomberg index is up more than 6% so far this year.
“The war in Europe and the risk of an abrupt Russian gas cut-off are deteriorating growth prospects for Europe and local currencies, while Asia is grappling with its own growth woes and countries like China and Japan remain in easing mode. currency,” said strategists at ING Groep NV led by Chris Turner. “It’s hard to see this environment changing in the next six months, which means it looks like this dollar boom will continue.”