The rally in the US dollar, which has been underway for a few months, is gathering pace. The US currency has hit a six-year high against Japan’s yen and a 14-month peak against the euro. It has also strengthened against major emerging-market currencies, such as the South African rand.
The dollar index, which tracks its performance against a basket of major trading partners’ currencies, has climbed for nine weeks in a row, its longest winning streak since 1997.
The main factors influencing a currency’s value are the economic outlook and prospects for interest rates. And “the US economy just looks so much better than anywhere else”, says James Kwok of Amundi.
The recovering economy means the US Federal Reserve is set to end its quantitative easing (QE – money printing), programme in October, and raise interest rates from almost 0% in the next few months.
Some economists fear that the US labour market is tightening faster than the Fed thinks, which implies higher rates sooner rather than later. Higher rates boost the yield on US assets, making them more appealing.
Meanwhile, monetary policy in Japan and the eurozone is loose and getting looser. The Bank of Japan is printing money and said it would print more if needs be. The European Central Bank is widely expected to have to embark on large-scale QE to ward off deflation.
So rates are unlikely to rise for a long time, suggesting the dollar rally has room to run. Morgan Stanley expects the euro-dollar rate, now at 1.29, to have hit 1.22 by the middle of next year.