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What does the continued rise of the dollar mean for the global economy and emerging markets?

The US dollar continues its strong gains in recent weeks, ignoring speculation about a decline in its global standing as some countries seek to reduce dependence on it.

The US dollar continues its strong gains in recent weeks, ignoring speculation about a decline in its global standing as some countries seek to reduce dependence on it.

The US currency benefited from the strong performance of the largest economy in the world, and expectations that high interest rates will continue for a long period.

Noticeable gains for the dollar

The dollar index - which measures the performance of the US currency against a basket of six major currencies - touched its highest levels in 6 months last week.

The US currency ended last week's trading at 105.2 points, remaining close to its highest levels since March at 105.34 points, which it recorded earlier the previous week.

- The dollar index has risen for nine consecutive weeks, in the longest wave of weekly gains since 2014.

The dollar succeeded in recovering from the low recorded in mid-July, below 100 points, to rise by more than 5% since that time.

واستفادت العملة الأمريكية من الأداء القوي للاقتصاد الأكبر في العالم، والتوقعات بشأن استمرار معدلات الفائدة المرتفعة لفترة طويلة.

Since the beginning of this year, the US currency has risen by about 2% against a basket of six major currencies.

The rise in the dollar index came with the rise of the US currency against the Japanese yen to its highest level in 10 months, with one dollar equivalent to 147.8 yen at the end of last week.

The dollar also rose against the euro to its highest level in about 6 months, at $1.0629, earlier last week.

What's behind the rise?

The rise of the dollar supported the strong performance of the US economy, in addition to benefiting from the weakness of other major economies led by Europe and China.

- Recent economic data indicate continued strength in US economic activity and improved investor sentiment as the labor market continues its strong performance.

The dollar also benefits from the gap in the monetary policy path between the US Federal Reserve and other banks such as the European Central Bank, the Bank of Japan, and others.

Joel Krueger, currency strategist at LMAX Group, believes that the focus of currency markets is on the difference between the monetary policy plans of the European Central Bank and the Federal Reserve.

Last week, the European Central Bank raised interest rates in the euro zone to a new record level of 4%, but hinted at the end of the monetary tightening cycle.

- While the markets are still anticipating the possibility of an additional rate increase by the Federal Reserve in the current year, given the fact that the current interest range is between 5.25% and 5.50%.

FedWatch forecasts indicate that the Fed will hold interest rates unchanged at the current September 20th meeting, but it may hint at the continued need to tighten monetary policy later.

The dollar also benefited from the continued accommodative policy of the Bank of Japan, as the bank maintains the only negative interest rates in the world currently at -0.10%.

Krueger said: “If we are heading toward continued pressure on the Fed to raise interest rates again, at a time when other central banks are pricing in their interest peaks, this may indicate the possibility of further rise for the US dollar.”

The dollar also benefits from the continued rise in US Treasury bond yields, as the yield on two-year bonds rose above 5% for the first time since 2008.

What does a strong dollar mean?

- A rising dollar usually represents a bad development for the global economy, financial markets, and American companies.

A recent study by the International Monetary Fund indicated that a 10% rise in the US dollar causes the GDP of emerging market economies to fall by about 1.9% after one year, with the negative impact continuing for two and a half years.

The impact of the rise in the dollar on emerging markets appears through a sharper decline in trade volumes, a decrease in available credit, a decline in capital flows, a tightening of monetary policy, and a decline in stock markets.

With regard to the markets, the rise of the US currency puts pressure on basic commodities such as gold and oil, as the cost of purchasing them increases for holders of other currencies.

A strong dollar also hurts the profits of American companies that do business outside the United States.

Apple, which obtains 60% of its revenues from outside the United States, said that the strong dollar reduced its sales in the last quarter.

Disney also stated that it expects a decline in the number of visitors to its international parks, while Nike indicated that it expects a negative impact of exchange rates on total sales.

In general, companies listed in the S&P 500 index that generate more than half of their revenues from outside the United States expect a decline in profits of about 18% in the current quarter, compared to expectations of a 4% increase in profits for companies with most of their business located inside the United States. .

Will the rise continue?

Expectations are rising regarding the continued strength of the US dollar during the coming period, with the monetary policy course and economic performance outperforming those of other major economies.

Hedge funds turned to betting on the rise of the US dollar for the first time since last March.

- Leveraged hedge funds that rely on borrowing and other entities maintained a total of 18,000 long or long positions in the dollar in the week ending September 12.

Saxo Bank analysts said that market pricing of a nearly 40% possibility of raising US interest rates again this year, in addition to talk of keeping them at high levels for a long period of time, provide support for the dollar to continue its gains during the coming period.

- HSBC Bank revised its estimates of the dollar’s performance, expecting the US currency to continue to strengthen over the next year.

The bank believes that the dollar will benefit from weak economic growth in Europe and China, which will put pressure on risk appetite and support demand for assets linked to the US economy.

HSBC believes that the dollar will rise against the euro to the level of $1.03 in the first quarter of next year, compared to previous estimates of $1.15. It may also reach 148 yen against the yen from 132 yen in previous estimates.

Research firm ING believes that the dollar index should find strong support below 105 points.

Sources: Figures - Reuters - Bloomberg - ING - Barron's - Wall Street Journal - CNN



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