Gertrude Chavez -Dreyfuss, Saqib Ahmed

NEW YORK, (Reuters) – A steady rally in the dollar has picked up, fueled by a hawkish tone from the Federal Reserve and rising Treasury yields, as well as concerns about a prolonged battle for the U.S. debt limit. (https://www.reuters.com/business/finance/wall-street-nervous-about-washington-debt-ceiling-warnings-sound-2021-09-29)

Year-to-date, the greenback has increased 4.7% and is at its highest point in one year against other currencies. The CFTC reports that net bets placed on the dollar in the futures markets have risen to a high point of 18.8 months.

(Graphic: Betting on the buck – https://fingfx.thomsonreuters.com/gfx/mkt/zgpombddkpd/Pasted%20image%201633012028300.png)

Due to the dominance of the US dollar, the trajectory it takes can have wide-ranging implications for all parties, including corporations and global central bankers.

Although a strong dollar may be an indicator of economic strength and might even signal that there is more to come, it can also cause problems for U.S. exporters. This can make their products less appealing abroad as well as making it more difficult for international companies to exchange their money back into American currency.

Simon Harvey from Monex Europe, London senior FX market analyst said: “The U.S. dollars move that we are seeing right now is due a confluence among factors that all align to create the perfect storm.”

One key driver of the dollar’s strength has been a more hawkish Fed (https://www.reuters.com/business/finance/fed-likely-open-bond-buying-taper-door-hedge-outlook-2021-09-22), which last week said it would start unwinding its $120 billion in monthly government bond purchases as soon as November and potentially begin raising rates in 2022, earlier than some investors had expected.

The yields of 10-year United States Treasury Inflation Protected Securities (which strip out inflation) have increased by approximately 37 basis points over the same period as its German counterpart. This has helped to increase the appeal of dollars-denominated Treasuries over their foreign counterparts.

Richard Benson from Millennium Global, London, said that “it seems the consensus belief that the Fed taper was in dollar price” was wrong. The dollar has been supported by a 20%-30 basis point backup in yields.

(Graphic: Real difference – https://fingfx.thomsonreuters.com/gfx/mkt/zdvxodeeypx/Pasted%20image%201633010951685.png)

A nasty fight over raising the U.S. debt ceiling (https://www.reuters.com/breakingviews/us-political-divisions-crash-into-debt-ceiling-2021-09-28), which could result in a U.S. default if lawmakers do not agree by Oct. 18, is also pushing up the dollar, a popular destination for nervous investors.

So are worries over the meltdown of heavily indebted China Evergrande Group (https://www.reuters.com/business/investors-grappling-with-evergrande-fallout-weigh-risk-wider-pain-2021-09-20), once the country’s top-selling real estate developer, as well as concerns over rising inflation and potentially slower growth, said Harvey, of Monex Europe.

In September, the fell by 4.8%, making it its worst month since March 2013. However, the rose by 1.7%.

Harvey explained that the majority of these factors point towards a more stagflationary macroenvironment, which is leading to markets seeking refuge in the dollar.

Many people also want to assess the possible effects of a stronger Dollar on their corporate balance sheets.

The technology sector is most vulnerable to currency fluctuations. More than 54% in total revenue comes from abroad, according to a Bespoke Investment Group analysis. The materials sector is next, with almost 46% coming from overseas.

Matt Weller is the global head for research at Forex.com. He noted that the dollar has not rallied from its previous levels, and it still remains below what it was in prior years.

He said that most firms would be concerned if the index of the dollar approaches the 100.00 mark as we enter 2022. On Thursday the index was around 94.25.

Investors believe that the dollar’s strength will not last. Neuberger Berman analysts stated in a note recently that the dollar is in a bear market after reaching its peak in March 2020. They expect it to eventually fall lower.

They base their forecast on an assortment of factors. The projections include a decrease in US contribution to global gross domestic products starting in 2022. These projections, according to the firm, have coincided in the past with dollar weakness.

Some others, however, believe that the Fed’s hawkishness will continue to keep the U.S. currencies elevated over time.

Societe Generale’s (OTC) analysts recently reported that the dollar could increase by up to 10% from current levels if Fed tightening is anticipated.

Mazen Issa is senior FX strategist for TD Securities. He expects the dollar to keep rising, but he believes the currency does not have the potential to pose a risk to companies.

He stated that “The U.S. dollars has proven its ability to flex through key technical marks and it will prove difficult to unwind this in the near future.”

(Graphic: King dollar – https://graphics.reuters.com/USA-MARKETS/xmvjokwddpr/chart.png)