By Alun John and Dhara Ranasinghe
LONDON (Reuters) – A rise in the dollar, driven by a strong economy, persistent inflation and geopolitical tensions, has unnerved policymakers from Tokyo to Beijing and Stockholm.
The dollar is at its highest level since November against other major currencies, poised for a fourth straight month of gains.
The latest rally, after stronger-than-expected inflation data in March, which pushed back US interest rate cuts even further, underlines how sensitive currency markets are to relative interest rate changes.
“We are monitoring investor flows and dollar buying since the CPI release has been strong,” said Tim Graf, head of macro strategy for Europe at State Street (NYSE:) Global Markets.
Here are some pressure points caused by the strong dollar.
1/ JAPAN AND KOREA
The warning light for the yen in Tokyo is flashing.
One dollar is worth just under 155 yen, the strongest since 1990, and Japan has warned it may start buying yen to support its value.
Even after Japan ended eight years of negative interest rates last month, the spread between Japanese and US yields remains wide and is expected to remain so for some time, keeping the yen weak. The yen, the worst performing G10 currency this year, is down 9%.
The dollar has risen about 7% against the Korean won in the past month alone and is at its highest level in a year. Last week, in a rare warning, the United States, Japan and South Korea agreed to “close consultations” on currency markets.
“A statement like this suggests that if the Japanese Ministry of Finance or equivalent authorities in South Korea want to go ahead and moderate the volatility of their exchange rate, the US won’t necessarily object,” said James Lord, head of FX and Emerging Market Strategy. at Morgan Stanley.
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2/ CHINA AND EMERGING ASIA
The strong dollar is causing pain across Asia.
The Indian Rupee and the Vietnamese Dong are at their weakest point ever. The Indonesian rupiah is at a four-year low and the central bank is talking about intervention, although this is much more common in emerging markets.
Traders are also watching, both onshore and offshore, which has depreciated much less than comparable stocks.
A weak yuan would help Chinese exporters but could stimulate capital outflows.
“It’s definitely at the top of the list” when it comes to Asian currencies under pressure, said Adarsh Sinha, co-head of Asian rates and currency strategy at Bank of America.
“It’s one of the most popular ways to be short because it doesn’t move.”
3/ EURO ZONE
The euro, which is trading just above $1.06, is certainly not one of the weakest major currencies against the dollar. But above all, banks have recently lowered their expectations for the euro/dollar.
Before the latest US inflation data, markets had largely seen the European Central Bank and Federal Reserve as taking a step in the right direction with interest rate cuts. The ECB is now expected to start spending cuts in June and an expected Fed cut in September has pushed the euro to its lowest level in five months.
“If the euro continues to weaken below $1.05 and oil prices rise, you will have inflation at your back, so the ECB will have to be very careful after a first interest rate cut,” said the head of Societe Generale (OTC:). business research FX and rates Kenneth Broux.
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4/ SWEDEN
Importing inflation through a weaker currency is mainly a problem for small economies.
While Swedish inflation is falling, boosting expectations for a rate cut in May, central bank deputy governor Per Jansson thinks further currency weakness could spell trouble for the inflation outlook.
The Swedish krona has fallen about 8% against the dollar so far this year and could weaken to 11.14 per dollar in six months from 10.89 now, Goldman Sachs predicts.
“The ‘higher for longer’ narrative in the US is creating a problem for (the Riksbank),” said UBS FX strategist Yvan Berthoux. “As monetary conditions (in Sweden) start to ease in the short term, the interest rate differential is widening, which is negative for the currency.”
5/ SWITZERLAND
It’s not bad news everywhere.
The Swiss franc has weakened 7.5% against the dollar so far this year, partly due to the surprise Swiss interest rate cut in March.
However, unlike most of its peers, the SNB is concerned about the currency’s strength given concerns about struggling exporters.
“Inflation continues to surprise on the downside, so that implies monetary conditions are a bit too restrictive, which means (the SNB) is happy to see the franc weaken,” Berthoux said.
UBS expects the dollar to rise from 0.91 francs to 0.952 francs by the end of the year.
