An ever-stronger greenback is marching ever higher and is making new multi-decade highs this morning. It is a truly historic move we are witnessing, over the last few weeks especially. Major currencies like GBP and NZD are getting close to being 9% down against the dollar, in a single month. The meltdown/melt-up doesn’t look like it is going to slow any time soon. A slew of hawkish Fed speakers hit the wires yesterday. A new page in the energy war in Europe looks to be opening on news that Nord Stream was a potential act of sabotage. Recent US domestic data surprised to the upside. All of this news has pushed USD higher as the benchmark US 10-year Treasury hits the major psychological level of 4%.
Many market watchers are now talking about the 1980s and what the US authorities did to tame inflation as the dollar soared. Paul Volcker was the man at the helm of the US Federal Reserve. Like the current Fed of today, he was prepared to accept recession as collateral damage, and he eventually took rates to 15%. While no one in the market is projecting the Fed funds policy rate is going into double figures anytime soon, there is speculation that we could see a co-ordinated response to the strong dollar.
Today, as part of central banks' efforts to depress rampant prices, they need to keep their currencies strong, as this will lower the costs of imported goods such as energy. While weakening currencies was the name of the game in the previous decade, now it is the other way around. And many countries outside of the US will continue to face policy headwinds in the face of the raging dollar.
First GBP, now CNH
The pound looks precarious after it failed to hold above 1.08 yesterday. The BoE’s chief economist warned that a significant monetary policy response was needed to counter fiscal easing. But he played down the chance of an intermeeting response. He also scored something of an own goal by saying the bank will continue with gilt sales. A stop to this was mooted as a possible move to slow the sterling selloff. We get the bank’s Cunliffe and Dhingra speaking today but a push near to the record lows in GBP/USD looks tempting for dollar bulls.
We don’t often focus on USD/CNH, but that is getting some attention this morning as it has traded to a new all-time high above 7.20. It seems the Chinese authorities are letting the currency float after stronger fixings and other measures failed to slow the march higher. This depreciation is important as it has a meaningful knock-on effect on commodity currencies. While the aussie is touching lows last seen in April 2020, the kiwi is closing in on the pandemic March 2020 spike low.