Column-Dollar won’t go down like the rest of the world won’t let it: Mike Dolan By Reuters

By Mike Dolan

LONDON (Reuters) – The dollar just had its best week in two years, showing once again how dangerous it can be to bet against the U.S. currency if the rest of the world doesn’t let it fall.

The DXY index, which tracks the greenback against the most traded global currencies, rose more than 2 percent last week — a stunning rumble, not least for many speculators who have been short on the greenback and waiting for it to faint.

While the rally was fueled in part by the US jobs report – and the related rethinking of the Federal Reserve’s interest rate path – the dollar’s rebound was well under way before Friday. The payroll figures are just icing on the cake.

The main catalyst for the dollar’s renewed strength was clear signals from central banks in Europe and Japan that any Fed efforts to increase the lead on interest rate cuts would be matched in kind.

The rest of the world’s major central bankers certainly took note of the Fed’s opening 50 basis point bailout last month in what signaled a 250 basis point easing cycle.

The move was followed by a series of sharp comments from the heads and governors of the European Central Bank, the Bank of England and the Swiss National Bank. All suggested that their own decks were being cleaned and for accelerated relaxation.

While the Bank of Japan had moved in the opposite direction, both the BoJ and the country’s new prime minister poured cold water on plans to further “normalize” policy with higher rates following the Fed’s big tapering.

Add to that signs that the SNB is already intervening in currency markets to limit the Swiss franc’s rise, ongoing intervention by the Reserve Bank of India and even a rebound in China’s foreign reserves, and it’s easy to see why the dollar is long. – the downward trajectory was frustrated.

“Staggered” Accumulation of US ASSETS

But really big capital is shifting, supporting the dollar less in the public space than in the private space and reflecting the seemingly insatiable appetite of overseas investors for US assets.

Societe Generale (OTC: ) currency strategist Kit Juckes was puzzled this week as to why the dollar is rising again so soon after the Fed started cutting rates. He noted that the dollar’s two previous multi-year rallies in the past 50 years were completely reversed after Fed easing began.

Juckes pointed to data showing that Japanese mutual funds have already resumed buying US Treasuries and overseas demand for dollar call options is growing. The rapid return to already overcrowded American markets is, in his words, “taking American exceptionalism to new levels.”

So the dollar remains stubbornly overvalued: the trade-weighted real index is still about 30% above levels seen 10 years ago. This creates growing unease about the extent of global exposure to US assets, the particular twist it has on the dollar exchange rate and its effect on US competitiveness, and resurgent anxiety about “global imbalances”, which was prevalent 20 years ago.

SocGen strategist Juckes pointed out that foreign investors have increased their net holdings of US assets by a “staggering” $40 trillion since 2020 – making it all the more remarkable that this thirst has yet to be quenched.

“I’m sure a weaker dollar would help reduce some of the imbalances in the global economy, but if investors have so little confidence in their domestic policies and asset markets that they’re already returning to the US, how is that happening?” he said.

Furthermore, there is little or no sign that US investors have the remotest interest in underperforming overseas markets.

US mutual fund numbers saw net outflows from global equities over the past month, a fairly consistent trend since the Fed began raising interest rates in March 2022.

So what could shake investors’ unabashed confidence in the resilience of the US economy and, by extension, the greenback?

Geopolitical concerns are certainly as high as we have seen them in many decades. But this undoubtedly increases demand for dollars, encourages US money to hang on to home, and increases the appeal of unmatched US size and liquidity.

Could the US election or threats to American democracy and institutions unsettle investors?

Certainly, a return of Donald Trump to the presidency after the Nov. 5 election may raise concerns, not least given Trump’s well-publicized support for both a weak dollar and political control of the Fed.

But it’s telling given that, even with the race to the White House on a knife’s edge, the world still seems determined to keep the dollar up.

The opinions expressed here are those of the author, columnist at Reuters