Between falling financial markets (stocks, bonds, and cryptocurrencies), rising inflation and rising rates, and the prospect of a global recession amid geopolitical tensions over Russia’s war in Ukraine, there remains one winner: the dollar.
The dollar index, which measures the evolution of the dollar against a basket of six currencies: the euro (at 57.6%), the yen (13.6%), the pound sterling (11.9%), the Canadian dollar, the krone (Swedish krona) and the Swiss franc is at their highest level in 20 years (see picture).
“The US dollar is playing its role as the ultimate safe haven in the foreign exchange market in the face of accumulating economic, financial and geopolitical risks. This is what is commonly called the flight into quality “comment experts from Mondial Change, a platform specializing in foreign exchange markets.
Against this background, the euro and the pound sterling lost 14% of their value over the year. At the same time, the dollar gained more than 18% against the yen, 5.7% against the yuan and nearly 13% against the Korean won. Even gold, which is par excellence a safe haven against inflation, has fallen 3.5% in a year!
The dollar loses more than 13% against the ruble
Against the ruble alone, it lost more than 13.55% for the year, trading in the region of 65.85 rubles on Monday after hitting a record high of 150 rubles in early March. Obviously, the situation with the Russian currency is special because of the measures taken by the Russian central bank, in particular the introduction of strict capital and exchange rate controls.
“The dollar looks set to outperform the G10 currency package as other countries, especially in Europe, grapple with stagflation risks and the Fed continues to raise rates.”emphasizes Stephen Barrow, an economist at Standard Bank.
It is for this reason that, as investors around the world seek to secure their returns in a context of great uncertainty about the outlook, US debt remains attractive. Comparing 10-year bonds, US Treasury bonds yield 2.9%, while British securities yield 1.79%, German bonds 1% and French OATs 1%, 0.52%, while Japanese bonds yield 1.79%. less than 0.25%. %.
This strength of the dollar also allows the United States to make its imports less expensive, which helps cap inflation, which is still at a 40-year high, at 8.3% annually in April. It also gives some leeway to the Federal Reserve, which began tightening its monetary policy in March and intends to continue raising rates in the coming months to calm overall price increases. For US companies, what is at stake depends on their status. Those who import intermediate goods can thus maintain or even lower the prices of their products, on the other hand, those who export become less competitive in the international market.
However, the international situation is not good, with a growing risk of recession. In Europe, the economic outlook looks more challenging. The IMF has just revised downward, from 3.9% to 2.8%, eurozone growth in 2022. The European Commission forecasts inflation at 2.7%, which should remain high at 6.8% by the end of the year. A black scenario for the European economy, which is also a consequence of the war in Ukraine and Western sanctions against Russia.
Dollar up 7% against yuan in less than a month
Similarly, the impact of strict lockdowns in China, especially in Shanghai, following a zero-Covid strategy, is starting to take its toll on its economy. This is evidenced by several indicators for April. Unemployment jumped to 6.1% for the year, approaching the record 6.2% hit in 2020 at the height of the pandemic. Exports rose 3.9%, the lowest monthly increase since June 2000. Surprising compared to March, during which they rose by 14.7%. Retail trade fell again in April by 11.1% y/y after 3.5% in March. The country’s industrial production fell by 2.9%. With the exception of the pandemic period in early 2020, industrial production has never declined in more than 30 years. Finally, on the financial markets side, the Shanghai Stock Exchange Index is down almost 13% year-on-year.
As for GDP growth, the 5.5% target set by the Beijing authorities for this year will be difficult to achieve. The International Monetary Fund (IMF) now expects 4.4% for the People’s Republic. Unprecedented for decades, the growth gap between China and the US (3.7% according to the IMF) is narrowing.
This competition between the two economic giants is between their currencies. Dollar up nearly 7% against yuan in less than a month (see picture).
But unlike the dollar, the yuan, the only currency that comes from a world economic leader (even the ruble, before the imposition of Western sanctions, depended on the foreign exchange market) that controls the movement of capital, considers its value to be fixed by the central bank. China (NBK). In other words, any holder of the Chinese currency faces a sharp devaluation and the inability to freely use the currency for settlements, if Beijing chooses to do so. In addition, China is the second largest foreign holder of US debt after Japan with $1.054 billion in February, according to the US Treasury Department.
China, insignificant share in international payments
After the introduction of sanctions against Russia, the willingness of some countries to use the yuan for settlements under international contracts has increased. According to the latest data from the now well-known company Swift (Society for Worldwide Interbank Financial Telecommunications), the share of payments in Chinese currency reached a new record in January, amounting to 3.2% of global payments. However, even if these transactions have increased, they are still very far from transactions in dollars (about 40%), euros (36.5%) or even pounds sterling (6.3%).
The royal dollar has not only not been affected by the “de-dollarization” of the global economy, it may even strengthen in 2022.