After making significant gains during a U.S. tightening cycle the dollar may rise further now it’s supported by an interest rate that is the highest for a major currency, and is also above the level of some emerging market currencies.
It is most unusual for the main interest rate influencing the dollar in the wake of a tightening cycle to be higher than those for riskier emerging currencies, as central banks of those nations are usually eager to follow the Federal Reserve.
During the period that U.S. interest rate have shot higher, a number of emerging nations, and some major nations broke with tradition with fairly predictable results with a number of currencies slumping as interest rates with United States changed considerably.
As a result several currencies, including those of South Africa, Malaysia, Turkey, and India have dropped toward record lows. Many others including euro and pound that have rates closer to those in the U.S have still weakened significantly.
Japan’s yen which is the only currency undermined by a negative interest rate has dropped to a record low on a trade-weighted basis.
The currencies of nations considering easing or doing so like Thailand, Czechia, China and Hungary have come under pressure this year as expectations for U.S. easing have been pushed back.
The main U.S. interest rate which is eyed around 4.5% in December will remain attractive to traders, whether they are thinking positively and considering carry trades that prosper when stocks rise, or if thinking about the risk of a stock market reverse, that would fuel risk aversion and support the world’s reserve currency.
After retracing half of the rally seen when interest rates were rising, to alleviate an overbought situation, the dollar is well placed to rise. Unlike in 2022 when overcrowded investment in dollars led to drop, there is currently almost no speculation on dollar rising.
Freed of a big burden the dollar could rise as much as 10 percent in value.
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