09.05.202208:23 Forex Analysis & Reviews: Rigid dollar: strengthening despite negative trends

It is not the first time for the US currency to swim against the current and fight against the pressure of external and internal negative circumstances. This time, the greenback was once again at the height that he is trying to keep despite the forecasts that he will lose his leadership in the near future.

Last week, the greenback hit a 20-year high against a basket of competing currencies after the Federal Reserve's decision to raise interest rates. According to experts, these measures are designed to reduce skyrocketing inflation in the United States. The current situation has provided significant support for the USD, and the increase in rates has become a driver for the rise of the latter.

However, this fact now complicates economic growth in a number of countries. In the past, central banks have been positive about greenback appreciation, but the current change in exchange rates is adding to economic pressure and making it difficult to follow the Fed's lead.

Many central banks are ready to abandon the weakening of their national currencies, although they have recently adopted a different strategy. Note that a weaker currency increases inflation by raising the price of imported goods and services. According to Goldman Sachs, central banks in developed economies should raise interest rates by 0.1% to compensate for the collapse of national currencies by 1%. Recently, bank strategists have announced the possibility of so-called "reverse currency wars" that could become a new reality.

Despite some nervousness of the global market, the dollar started the week with a confident rise against the backdrop of a significant increase in yields in the US and investors avoiding risk. The reasons are a long Russian-Ukrainian conflict and fears about a further increase in interest rates. Analysts say factors such as the need to tighten financial conditions and rein in inflation are at the heart of further rate hikes.

Against this background, the greenback reached a 22-month high against a number of commodity currencies, in particular the New Zealand dollar. At the same time, the yield on the benchmark 10-year US Treasury bonds soared by 3.1464%, reaching the highest level since 2018. According to experts, the USD is supported by the superiority of the American economy and fairly low stock prices.The dollar is currently near a 5-year high against the euro, which is down 0.2%. On Monday morning, May 9, the EUR/USD pair was trading at 1.0505. The euro swung sharply towards a downward trend, continuing the negative trend of the previous week. Recall that earlier the euro reached a 5-year low against the greenback, falling to 1.0500. Against this background, forecasts for its fall to parity with the US currency intensified.

The current strengthening of the USD creates a lot of problems for emerging markets. This is especially true for countries with massive dollar debt. According to the IMF, 60% of low-income countries are at risk of a debt crisis.

However, this is unlikely to prevent further strengthening of the greenback. ANZ Bank specialists remind about the market's expectations regarding the Fed's rate hike by 75 basis points (bp) before the end of this year. According to currency strategists, this will serve as another catalyst for the growth of the USD. New US inflation data will be published on Wednesday, May 11. It is possible that negative macroeconomic statistics will provoke more aggressive rate hikes in the near future. However, if prices slow down to 8.1%, a positive scenario is possible.

Some analysts believe that undermining the credibility of the US currency, a key means of international payments, will lead to the collapse of the economic "bubble" in the US. This is facilitated by the active use of other currencies in global trade settlements. Similar trends started after the freezing of Russian foreign exchange assets. The potential withdrawal of the greenback from major international deals will reduce demand for it, experts warn. However, despite the galloping inflation and geopolitical pressure, the dollar is still on horseback and holds its ground.