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U.S. Dollar Dominance

| October 04, 2022

Chart Content: Year to date performance differentials between the Euro, British Pound, Japanese Yen, and U.S. Dollar.

Chart Significance: The U.S. Dollar’s relentless climb since the beginning of 2022 is tightening financial conditions across the globe. Two key factors are responsible for the Dollar’s dominance year to date. First, elevated geopolitical risk and global growth uncertainty have resulted in risk aversion and a flight to safe haven assets. Second, the Federal Reserve has lifted the Fed Funds rate expeditiously this year from near zero to a range between 3% and 3.25% in their quest to bring inflation back to their 2% target (with more hikes expected this year and next). This dynamic has strengthened the U.S. Dollar as higher yields attract investment capital from investors abroad seeking higher returns on bonds.

Potential Forward-Looking Implications: Extremely overvalued conditions and exuberant bullish sentiment point to an eventual peak in the U.S. Dollar, likely followed by depreciation of the currency over a cyclical investment horizon. Such an occurrence is apt to provide a tailwind to international equity performance. In the meantime, however, elevated risk aversion and real rate differentials are likely to continue to support the U.S. Dollar. Thus, partial Dollar-hedged international exposure is prudent for protection against further U.S. Dollar strength in the near term.


Investment advice offered through CX Institutional, a registered investment advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in the presentation may not develop as predicted.

All data is sourced from Bloomberg, through the release of monthly figures from the U.S. Bureau of Labor Statistics or from the Federal Reserve and any of its affiliated regional locations.