Oct 3, 2022 - Economy

Why Q4 will look a lot like Q3 for the dollar

Illustration of a giant dollar sign bursting through a brick wall.

Illustration: Brendan Lynch/Axios

The U.S. dollar begins the final quarter of 2022 bolstered by the same fundamentals that propelled it higher against major currencies for most of the year ā€” with virtually nothing standing in the way of more gains.

Why it matters: A strong dollar is a brake against inflation that's still running uncomfortably high, for both consumers and the Federal Reserve. Yet U.S. multinationals that operate in markets where native currencies have weakened are poised to lose money when those revenues are translated into dollars.

  • Bannockburn's World Currency Index, a GDP-weighted basket of the currencies representing the 12 largest economies, dropped by over 2% last month, as everything but the Russian ruble and Mexican peso fell prey to broad dollar strength.

Driving the news: Last week, White House economic adviser Brian Deese downplayed the possibility that the U.S. would act to weaken its currency, which is trading close to its highest levels in about 20 years.

Yes, but: As Bloomberg Opinion's John Authers wrote on Friday, there are a host of reasons America shouldn't countenance the idea, even if it wanted to.

Zoom out: Aside from a hawkish Fed moving full speed ahead on higher rates, there are (at least) a few reasons the dollar will end the year on an even stronger footing:

  • There's an argument to be made that the dollar's gains are approaching a tipping point. Yet absent an intervention threat that injects two-way risk into a one-way trend, dollar weakness is unlikely to materialize anytime soon.
  • A strong currency helps the Fed's goals of restraining inflation and soaking up excess liquidity in the economy. Bank of America notes that dollar strength is "fully justified by underlying drivers, but severely tightening global financial conditions," an objective actively sought by the Fed.
  • Most of the dollar's victims are at least partly reliant on exports, even if a weaker currency exacerbates inflation. As Axios' Felix Salmon pointed out this weekend, some countries are quietly embracing the competitive boost to exports.

The bottom line: "Policymakers [are] stepping up efforts to stem FX volatility, but evidence from UK, Japan China suggests unilateral measures insufficient to reverse trend," Bank of America analysts wrote recently. The U.S. won't act unless there's "direct blowback from [a] strong USD."

Go deeper