Page 6 - ISQ October 2022

INVESTMENT STRATEGY QUARTERLY

Q&A: Dollar Dominance—Can It Continue?

Tracey Manzi, CFA, Senior Investment Strategist, Investment Strategy

The US dollar has been getting a lot of attention these September rate-setting Open Markets Committee meeting.
days. This is not surprising given the greenback has Further rate hikes are expected for the remainder of this year.
The Fed’s policy stance has been the key factor driving the
gained over 17% against a basket of currencies this year
dollar higher, particularly as the Fed is on track to tighten
to levels not seen in over 20 years.* While moves of this more aggressively than other central banks. Higher relative
magnitude are not unprecedented, the dollar’s steady interest rates are supportive for the US dollar. The
climb is starting to have spill-over effects on the rest of challenging macroeconomic backdrop and uncertain
geopolitical climate has also contributed to the ongoing
the world. This has implications for the economic
strength of the US dollar. It is not surprising to see investors
performance of various regions and on the financial flock to dollar-denominated assets during periods of economic
markets. Sanctions against Russia have also revived stress or elevated uncertainty as the US is considered a ‘safe-
investor concerns about whether the dollar can maintain haven’. With no end in sight for the Russia-Ukraine conflict,
its role as the world’s reserve currency. In this Q&A we Europe on the brink of recession and China’s zero-COVID
policy stance still restraining Chinese economic growth, the
delve into some of the more pressing questions on
dollar’s strength seems likely to persist.
investors’ minds.
Q: What are the implications of a strong dollar?
Q: Why is the dollar so strong?
A: Aside from the obvious—it’s cheaper to take a vacation
A: The surge in the dollar this year has primarily been driven by the overseas—the US dollar plays an important role in the world
hawkish Federal Reserve (Fed). With inflation running near a economy. That is because it is the currency that powers global
40-year high, the Fed is in the midst of one of its most aggressive trade. The price of nearly every commodity contract traded on
tightening cycles in decades—raising rates from near zero at the the world markets — from oil to copper to wheat — is priced in
start of the year to between 3.0% and 3.50% following the US dollars. Therefore, when the US dollar is strong relative to
other foreign currencies, it drives up the cost of imported goods
*as of 23/09/2022

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