Rising Dollar Makes Central Banks Catch Up | Daily Market Analysis

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The dollar rose to a new high as the pressure of rising U.S. interest rates on the global economy continues to intensify.

At the same time, Treasury 10-year bond yields surpassed 4% for the first time since 2010, sparking gains in the short-term bond market, where the yield on 2-year bonds is 4.25%, reflecting expectations that the U.S. Federal Reserve will not cut interest rates significantly until 2024.

A key factor contributing to the dollar's recent rise has been the U.S. Federal Reserve's steep interest rate hike to bring record inflation under control. One consequence of this has been that the rest of the world's central banks are trying to keep up with the rapidly rising dollar.

The Bank of Japan, which has historically devalued the yen to support its export-oriented economy, recently had to intervene in the foreign exchange market for the first time in 24 years to strengthen its currency, while the British pound hit another record low against the dollar. The dollar is up more than 20% against both the yen and the British pound, and at least 7% higher than any G10 currency this year.

Following the U.S. Federal Reserve, which recently raised its rate by 75 percentage points, the rest of the world's central banks have also taken aim at protecting their currencies and fighting inflation by raising their rates. In particular, central banks in Britain, Norway, Switzerland, and Indonesia have raised their rates.

The reason for such actions by central banks is that if they do not follow the example of the Fed's policy tightening, their currencies will weaken further against the dollar, which will eventually raise the cost of imports and make fighting inflation even more difficult.

But nevertheless, according to analysts, the efforts made so far, especially with regard to the yen, will do little to change the overall trend.

Thus, Deutsche Bank analyst George Saravelos believes that "The bottom line is that for the yen to start strengthening, the global positive environment for the dollar must change."

If the Bank of Japan's intervention was the most significant in many years, the Bank of England's action on Monday was less visible, although after raising the rate by 50 basis points last week it said it would not hesitate to raise the rate again at its next meeting in November.

The bank is very concerned about the devaluation of the pound on rising prices, especially after the new cabinet proposal for a spending package to reduce the country's household and business energy bills, which caused the pound to plummet to a record low against the dollar.

At a time when British inflation is 9.9 percent, the country has to import most of its food and fuel from abroad, and the pound's fall will make these goods more expensive.

As for other central banks, they are trying to keep up with the Fed. For example, the People's Bank of China supported the yuan, fixing its exchange rate at a higher-than-expected level in August, while the Swedish Riksbank announced a 100 basis points rate hike.

The Swiss National Bank raised its rate by 75 basis points, abandoning the country's negative interest rate that had been in place since 2014 to stimulate the economy.

All of these measures support the argument that most countries cannot compete with the powerful dollar and the Fed.