This year, the US dollar has been rising rapidly across the board. However, some analysts are worried that such a stellar rally could lead to devastating consequences.
USD undisputed king on Forex
The 2022 year is sure to become one of the best ones for the US dollar. Since January, the US dollar index, which measures the strength of the greenback versus its rivals, has already jumped by almost 20%.
Currently, it is trading at the 20-year high. It is widely expected to climb higher. Analysts are confident that in the near future a rally will persist.
There are two main drivers for the growth of the US currency.
The most crucial one is the Fed's monetary policy tightening. Now, the Fed is strongly committed to aggressive rate hikes to tame inflation. It is also the most hawkish regulator compared to others.
The Fed is likely to raise the key rate by 75 basis points for the fourth time in November.
However, some analysts do not rule out the likelihood of a 100 basis point rate increase. If so, such a rate increase will only spur a further rally of the US dollar.
Apart from them, its growth may be facilitated by mounting fears about the global recession.
Like the Fed, many central banks worldwide continue to raise interest rates to cap soaring inflation.
However, monetary tightening may significantly hurt the global economy, triggering its slowdown. Such a scenario is favorable for the US dollar, which is considered to be the best safe haven currency today.
Further rally to lead to prolonged bearish trend
The US currency is widely projected to drift higher.
It may grow noticeably versus the euro amid the rate gap between the Fed and the ECB. In addition, in the foreseeable future, the euro will hardly regain momentum due to economic and political woes.
The GBP/USD pair is likely to show a similar dynamic.
The pound sterling, which has already decreased by 20% against the US dollar this year, will not be able to assert strength due to a more aggressive Fed monetary policy and economic headwinds.
The outlook for the Japanese currency is also gloomy. Since the beginning of the year, it has declined by more than 21%. The yen may dip lower because of the divergence in the monetary policies of the Fed and the BoJ.
Taking into account all these factors, Bloomberg predicts that the US dollar index will approach new highs in October. However, after that, the US dollar may lose ground.
Analysts warn that as the US currency is growing, some central banks may undertake a coordinated intervention.
The latest MLIV Pulse survey showed that about 45% of traders expect the adoption of a new Plaza Accord, which took place in 1985.
As a reminder, the United Kingdom, France, Germany, Japan, and the United States agreed to jointly intervene and depreciate the US dollar 37 years ago.
In the 2 months after the Plaza Agreement, the US currency drifted lower by more than 10%, and over the following 2 years, the DXY index collapsed by almost 50%.
A joint currency intervention may take place this year. However, the US rejected this idea.
Not so long ago, director of the National Economic Council Brian Dees said that he did not expect any agreement between the largest central banks that could hinder a further rally of the US dollar.
However, it is better to say alert as now there is another scenario that may come true.
USD/JPY hovers near threshold
On Monday morning, the USD/JPY pair managed to break through the psychologically important level of 145. Last week, it failed to approach this level.
In the Asian session, dollar bulls entered the market despite the warning of Japanese Finance Minister Shunichi Suzuki about another intervention.
He said that the BoJ stands ready to take decisive steps in the foreign exchange market if excessive yen moves persist.
In September, the BoJ intervened in the forex market and spent $19.34 billion to buy back the yen for the first time since 1998.
Thus, the government decided to support the national currency when it slumped against the US dollar to a 24-year low of 145.90.
Many analysts are sure that further flirting of the pair with the 145 level will force the regulator to intervene once again.
The probability of another intervention is very high as Japan has sufficient foreign exchange reserves. As of August, they amounted to $1.29 trillion.
The problem is that the effect of the intervention is likely to be short-lived again.
The yen is expected to decrease as long as the Bank of Japan sticks to an ultra-soft monetary policy and other central banks, including the Fed, are committed to aggressive tightening.
Central banks should undertake a joint intervention if they want to put an end to the downward movement. So, sooner or later BoJ officials will have to mull over such a possibility
Perhaps by that time other regulators will also decide to dethrone the US dollar.