Financial Associated Press, July 18 (Editor Niu Zhanlin) Against the backdrop of economic recession expectations and global turmoil, the U.S. dollar index continued to strengthen. above. Wall Street is currently unanimous that the dollar will continue its rally, and this rally has no end in sight in the short term.

 

Corresponding to the strengthening of the US dollar, major non-US currencies such as the euro, the yen, and the pound continued to depreciate. Recently, the exchange rate of the euro against the dollar once fell below the 1:1 parity mark; the exchange rate of the yen plummeted to nearly 140, the lowest level since the end of the 20th century; the exchange rate of the pound against the dollar has depreciated to below 1.2.

 

(Source: Yingwei Finance) The US dollar index, as a basket of currencies, reflects the overall situation of the US dollar and other currencies. At present, the weights of non-US currencies in the US dollar index are mainly in order: the euro 57.6%, the yen 13.6%, and the pound 11.9%. Therefore, the strengthening of the US dollar index is also equivalent to the depreciation of non-US currencies such as the euro, the yen, and the pound.

 

What happens in tandem with the continued strength of the dollar is the continued rise in inflation. The U.S. Department of Labor announced that the U.S. CPI in June rose by more than 9% year-on-year, the highest level since November 1981, and whether inflation can be contained within 10% is still unknown.

 

Fed officials have signaled they may raise rates for a second straight 0.75 percentage point later this month in an aggressive move to curb high inflation. Fed policymakers have also not ruled out more aggressive action at their July 26-27 meeting, raising rates by a full percentage point. While some officials have poured cold water on the idea in recent interviews and public statements.

 

Compared to the Fed's aggressive actions, other central banks' policy rates are lagging far behind, driving the dollar's strength. The euro zone's annual inflation rate reached 8.6% in June, but the European Central Bank's policy rate remains at 0%; the Bank of Japan's policy rate remains at -0.1%, and the central bank has repeatedly stressed that it will not adjust the policy rate.

 

The euro's "lingering sickness bed"

 

The weight of the euro in the dollar index is more than half, but under the predicament of the energy crisis, economic crisis and political crisis, the euro has no hope of turning over in the short term. Analysts believe that, affected by the spillover effect of the Federal Reserve's monetary policy, the depreciation of the euro against the dollar is exacerbating the economic difficulties of the euro zone; the appreciation of the dollar makes European energy imports more expensive, and the positive effect on European exports is limited.

 

Affected by many uncertain factors, the EU also lowered its economic growth forecast for next year. The European Commission's recently released summer economic forecast report said that the European Union is highly dependent on Russia's fossil fuels and its economy is vulnerable to the development of the energy market. The slowdown in global economic growth has also affected external demand, and economic activity is expected to be sluggish this year. A new round of natural gas price hikes could further push up inflation and dampen economic growth. At the same time, it cannot be ruled out that a resurgence of the Covid-19 pandemic in Europe could wreak havoc on the economy.

 

Hedge funds are aggressively shorting the euro and European stocks. "Forex markets are pricing in a severe recession in Europe," said Stephen Gallo, European head of FX strategy at BMO Capital Markets.

 

Shaun Osborne, currency strategist at Scotiabank, said: "The Bank of Japan is not expected to act soon on interest rates or yield curve control (YCC) policy, and the performance of the yen will depend on the direction of U.S. bond yields."

 

Political instability in the UK and fears of a recession weighed on the pound. Kallum Pickering, senior economist at Berenberg Bank, said in a report that the political situation in the UK in the next few months is difficult to predict; financial markets are likely to experience turmoil in the next few months, which is likely to continue into the autumn, The recent increase in uncertainty is likely to add further downward pressure on the pound.

 

Wall Street analysts expect the dollar to continue to rise as fears of a global recession intensify. Morgan Stanley raised its dollar forecast across the board last week, expecting the euro to fall 0.97 against the dollar by the end of September. "The Fed will do whatever is necessary to keep inflation in check, and growth may have to be sacrificed to restore price stability, but that's a price they're willing to pay."

 

Bank of America expects the dollar's strength to continue through the end of the year as the Federal Reserve raises interest rates to fight the hottest inflation in decades. In the latest report, Bank of America strategist Adarsh Sinha noted that the path of least resistance remains a stronger dollar until the fourth quarter of 2022.

 

spillover effects

 

A stronger dollar is a double-edged sword for U.S. consumers and U.S. businesses. While this has the effect of boosting domestic consumption, it has put pressure on the earnings growth of US multinationals.

 

Microsoft cut its earnings forecast in June after it said in April that a stronger dollar had reduced its revenue by about $300 million in the first three months of the year.

 

Investors will be closely watching second-quarter earnings this week from companies including Goldman Sachs, Tesla and Alcoa. "A strong dollar is definitely going to be a headwind to corporate earnings," said Adam Crisafulli, founder of market intelligence firm Vital Knowledge.

 

The rising dollar has also hit dollar-denominated commodities from oil to copper, hurting emerging market economies. When the dollar strengthens, it also becomes more expensive for these countries to service their dollar-denominated debt.

 

The IMF's Gita Gopinath believes that the dollar's role in global trade means that a stronger dollar could lead to a tightening of global financial conditions and a blow to real investment.