Quick Bites | The Strong Greenback

The American dollar is soaring.

The US economy is outperforming its developed economy peers, driving the value of the US dollar near its highest levels of the year. The US currency has gained 15% against the yen and 2.3% against the euro since the end of 2023. In Argentina and Vietnam, the buck has never been stronger.

The greenback’s rise reflects America’s economic dynamism, as well as interest rates higher than those of many rich counterparts. A rising dollar boosts Americans’ relative purchasing power by making imports cheaper. At the same time, it generally hurts exports—except the type who carry luggage, American tourists going overseas.

With bigger pay checks and record investment income in their pockets, Americans are piling onto planes abroad, propping up economies in Europe, South America, Asia and Australia. Nearly 3 million air travellers passed through Transportation Security screenings on June 23, an all-time high. Americans traveling abroad are sparing little expense, extending trips, ramping-up luxury excursions and hauling extra suitcases to load up on purchases. 

The US dollar hasn’t reached the same heights it touched in 2022, when the Federal Reserve began raising rates to slow inflation. That lifted bond yields, luring investors from around the world to the safe returns of US debt. 

At the start of this year, investors bet on as many as a half-dozen rate cuts by the Fed in 2024, a shift that could weaken the dollar. But inflation has persisted, and the Fed has held policy steady, even as the European Central Bank and others have begun to cut. 

Dollar-denominated assets such as stocks and bonds are still providing outsize returns, Goldman Sachs told clients recently, making the dollar “a high bar to beat” for investors. When weighed against a basket of foreign currencies in the WSJ Dollar Index, the US currency is more valuable than at almost any point in the past 20 years.

Changes in the USD since 2021

Source: WSJ

We think the AUD is under-valued relative to the USD and expect it to strengthen over the next 12 months. While we anticipate the Fed to start cutting rates in the next few months, the RBA is unlikely to follow suit until early in 2025. In the meantime, Australian commodity exports are reaping the benefits of a low AUD.

The AUD/USD exchange rate is showing early signs of a turn

Source: Trading Economics, Xchange