An Epic Dollar Rally Goes Into Reverse—and Investors Expect Further Declines

The U.S. dollar’s rally in 2022 gave the world a reminder of the currency’s ability to inflict pain on the global economy. Investors are optimistic that the dollar’s strength has now run its course.

As of Dec. 28, the dollar has risen 8.9% this year as measured by the WSJ Dollar Index, which tracks its value against 16 other currencies. That would mark its biggest yearly rise since 2014. The index peaked in late September at the highest level in data going back to 2001.

But the dollar is ending the year on the defensive, having given back roughly half of its gains since that high-water mark, as investors bet that U.S. inflation is slowing.

Most investors were caught off guard by the greenback’s strength this year. The currency had already risen in 2021 on expectations that the Federal Reserve would start raising rates this year to tame what Wall Street believed was a temporary increase in inflation. Some investors thought the dollar was overvalued and poised for declines.

Few were expecting inflation to stay so stubbornly high, or for the Fed to raise rates by more than 4 percentage points in the span of nine months. Rising rates boost the dollar by attracting investors from around the globe into U.S. assets such as Treasury bonds. Russia’s invasion of Ukraine turbocharged the dollar as investors fled to assets seen as safe and a surge in energy prices compounded inflationary pressures.

“Without Russia invading Ukraine, [a weak dollar] would have been the correct call” for 2022, said Derek Halpenny, head of research for global markets in the European region at Japan’s MUFG Bank. “That was the massive change, because that created this second global inflation shock that forced the Fed to go the way it did.”

The effects of the dollar’s rise have been global, helping to push foreign currencies down to historically low levels. The euro broke through parity with the dollar in July, and the British pound in September touched its lowest point in over 200 years of trading against the dollar, while the Japanese yen fell to its weakest point since 1990.

“The dollar can be like a vortex: as it starts to build power, the weaker things get taken up first,” said Andrew Keirle, a global fixed-income portfolio manager at T. Rowe Price. “When that centrifugal force grows and grows and grows, eventually even the good assets will start to move.”

About the Author: Patriotman

Patriotman currently ekes out a survivalist lifestyle in a suburban northeastern state as best as he can. He has varied experience in political science, public policy, biological sciences, and higher education. Proudly Catholic and an Eagle Scout, he has no military experience and thus offers a relatable perspective for the average suburban prepper who is preparing for troubled times on the horizon with less than ideal teams and in less than ideal locations. Brushbeater Store Page: http://bit.ly/BrushbeaterStore

One Comment

plankmember December 30, 2022 at 08:55

Anyone mentioning that US Treasury bond auctions continue to go No Bid. for most of the year – the only “buyer” is the treasury. Foreign countries/banks cannot offload them fast enough and largely buy gold.