Why the Dollar Is Strong and the Peso Is Weak Alongside the World's Currencies
(SPOT.ph) With no "kryptonite" to bring it back to Earth, the U.S. dollar is on a tear and its strength is causing the world's currencies—including the Philippine peso—to plummet to record lows. And with the current state of the global economy, the greenback's ascent will continue in the near future, according to analysts.
With the world's economies fighting to climb out or stay out of a post-pandemic recession, the dollar is regarded as a safe-haven currency, meaning investors gauge their chances of surviving these hard times by the amount of their dollar holdings. The dollar is the preferred currency for global trade so anyone who buys anything from overseas will need dollars to keep their businesses running.
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Why is the dollar strong?
Remember when oil prices soared close to the 100 per liter level at the start of 2022? That's due to the strong dollar. At that time, airlines also sought regulatory approval for higher fuel surcharges.
On October 12, the peso closed at P58.965 to the dollar, trudging close to the P60 vs. $1 for the first time in history. Authorities are hoping the seasonal bump in remittances from Overseas Filipino Workers will cushion the local currency's fall.
For context, the peso has hovered close to the P59 vs $1 for three weeks, indicating that the exchange rate has stabilized, said RCBC economist Michael Ricafort, attributing it to local authorities' "intervention".
“There is no kryptonite to blow up the dollar's strength immediately, with the Eurozone hampered by the war in Ukraine and China’s growth uncertain,” Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore, told Bloomberg News in late July.
“There is simply no alternative to the dollar no matter where you look and it's pummeling everything else as a result—economies, other currencies, corporate earnings.”
There's just no getting around the U.S. dollar as the "lubricant of global commerce", according to Bloomberg as 40% of the $28.5 trillion in annual global trade is priced in the U.S. dollar.
The Japanese yen has fallen to a 24-year low, and the Indian rupee, Chilean peso and Sri Lankan rupee have all dipped to all-time lows.
Will the dollar continue to be strong?
Yes, according to analysts. For as long as the Federal Reserve, the U.S. central bank, continues to increase interest rates.
Interest rate hikes by the Fed draw more investors to the dollar. Bond investors, in particular, will likely flock to dollar bonds when interest rates are higher. Consider that bond markets are bigger in size than stock markets.
Like our own central bank, the Fed is hiking interest rates at record pace to tame inflation or skyrocketing consumer prices. Interest rate hikes, as a foil to inflation, are intended to encourage people to spend less and save more, thus cooling the economy.
The reverse is true when interest rates go south. This means the economy is not moving enough and people are encouraged to spend, but only to a certain point when inflation is within target.
How long will the dollar stay strong? Analysts say the Fed could unwind its rate hikes in 2023.
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