It’s a long time since anyone referred to ‘the almighty dollar’ anything but ironically, but the greenback is staging its most dramatic rally since in six years.
The U.S. Dollar Index, which measures the buck against six major western currencies but not against emerging market currencies such as China’s yuan, has risen 7.1% in the third quarter, its biggest quarterly rise since the 2008 market panic.
And despite frequent reports of its demise, the world’s premier reserve currency is also at seven-month highs against Brazil’s real and Mexico’s peso, and near a six-month high against India’s rupee. The only major trading partner it isn’t strengthening against is the yuan, partly because of weaker demand for commodities (which are priced in dollars) from a slowing Chinese industrials sector.
But it’s the world most active foreign exchange pairing that is moving the most. The euro hit a new two-year low against the dollar Thursday, after ECB President Mario Draghi repeated in an interview that the bank is prepared to do more to stimulate the economy if need be and is “fully determined” to stop the Eurozone falling into deflation. That followed hot on the heels of figures Wednesday showing that U.S. new home sales soared in August.
The reasons for the dollar’s rise are many–not surprising, since the job of foreign exchange markets is to aggregate all the factors relevant in determining the value of one economy relative to another–but there is little doubt about the main one. The Federal Reserve is preparing to raise interest rates, as the remaining doubts about the sustainability of the U.S. economy evaporates, while the European Central Bank is doing everything it can to depress euro rates to stop the Eurozone economy from sliding into a triple-dip recession.
After more than five years of buying bonds to depress market interest rates, the Fed will end its “Quantitative Easing” program in October. On the other side of the Atlantic, the ECB earlier this month announced plans to buy some private bonds, and many analysts now expect it will have to widen its ambitions to the government debt markets to have the effect it wants.
“With geopolitics, commodity prices and medium-term inflation expectations all still pointing to downside price risks, the odds of full-blown sovereign QE from the ECB have risen materially,” Deutsche Bank analyst George Saravelos wrote in a research note earlier this week.
Data out Thursday from Frankfurt did little to change that picture, with the ECB confirming that credit to the private sector was down 0.9% on the year in August. That followed a dismal reading for a key business confidence indicator in Germany Wednesday, a fifth straight monthly drop driven largely by concerns about the hit to Germany’s export sector from the Ukraine crisis and sanctions on Russia, a major trading partner.
The Russian ruble, meanwhile, hit a new all-time low against the dollar on Monday, after reports suggesting that up to $120 billion could leave the country in capital flight this year.