Dollar Climbs Above Rivals, Threatens Financial Markets

A prolonged dollar rally is pressuring U.S. corporate earnings, hitting commodity prices and threatening to deepen a selloff in emerging markets, The Wall Street Journal reported.

The U.S. currency has continued to grind higher this year despite an escalating trade fight with China and broadsides from President Donald Trump, who has complained that the dollar’s strength is curbing growth.

Last month, the greenback rose even after the Federal Reserve cut interest rates for the first time in a decade, defying expectations that lower rates would cut the appeal of U.S. assets to yield-seeking investors.

The ICE Dollar Index, which tracks the dollar against a basket of six major currencies, stands near its highest level in more than two years and is up nearly 11% from its 2018 lows.

One key driver of the dollar’s gains has been the relative strength of the U.S. economy, which since 2015 until recently has allowed the Fed to raise rates far above the levels of borrowing costs in other developed countries.

As recently as last year, investors were betting that growth would accelerate abroad, boosting foreign currencies as central banks outside the U.S. raised rates. That pickup never materialized and investors now believe the gap in yields is likely to remain in place as central banks ease monetary policy to counter the effects of a global slowdown.

Even with last week’s decline in Treasury yields, investors can still expect to collect a far larger payout from U.S. government bonds than from those in any other developed country, including Europe and Japan, where negative yields have proliferated in recent years.

“There is nothing exceptional about U.S. growth, but it still looks pretty exceptional compared to other parts of the world,” said Alan Ruskin, chief international strategist at Deutsche Bank.

The dollar’s strength has been a double-edged sword, both inside and outside the U.S.

A stronger dollar is a negative for U.S. exporters because it makes their products less competitive abroad. It also is hurting U.S. multinationals by making it more expensive for them to convert foreign revenues into U.S. currency – a worrisome trend for investors betting on an earnings rebound in the second half of the year.

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