The dollar is rising, but it’s not entirely positive

New York (CNN) — The dollar is strengthening again after the turmoil of 2023, as Wall Street accepts that interest rate cuts will come later than expected.

The U.S. dollar index, which tracks the dollar against the pound sterling, euro, Swiss franc, Japanese yen, Canadian dollar and Swedish krona, is up 2.8% year-to-date as of Friday morning.

The US currency fell last November and ended the year low against a basket of currencies, as investors were optimistic that the Federal Reserve would soon cut interest rates. But Fed Chairman Jerome Powell said in January that interest rate cuts were unlikely to begin in March, as investors widely believed would happen.

Economic data in recent weeks have supported the view that the Fed will keep rates high for a long time. The economy created 353,000 jobs in January, underscoring the continued resilience of the labor market despite higher interest rates. The consumer price index rose 3.4% year-on-year in December, still above the 2% target set by the central bank.

A stronger dollar is bad news for U.S. companies that generate most of their revenue overseas, because it means fewer dollars on their bottom line when other currencies, such as the euro, are converted into U.S. dollars. Will be. But it also means that American businesses and consumers can spend less on imported goods, and Americans’ purchasing power increases when they travel abroad.

Monetary policy decisions of other countries also influence the trajectory of the greenback. In January, the European Central Bank left interest rates unchanged. But the dollar could continue to rise if ECB President Christine Lagarde even hints at a rate cut this summer, says Quincy Crosby, chief global strategist at LPL Financial.

“Suddenly the interest rate differential comes into play, whether it’s slower or faster than the Fed,” Crosby said.
Higher interest rates generally attract more international capital into a country, increasing demand for the currency and therefore its value.

The 10-year US Treasury yield has risen above 4% again this year as investors readjusted their rate expectations, giving another boost to the US currency.

Minneapolis Fed President Neel Kashkari said in an essay published Monday that rates could reach a higher neutral level after hovering near zero during the COVID pandemic.

“The implication is that, I think, it gives (the Federal Open Market Commission) time to evaluate upcoming economic data before lowering the federal funds rate, with less risk that overly tight policy derails the economic recovery. Will take it off,” Kashkari wrote.

Still, Todd Jones, chief investment officer at Gratus Capital, says he expects the dollar to eventually decline as the Federal Reserve moves closer to cutting rates. According to CME’s FedWatch tool, investors expect the Fed to start cutting rates in May or June.

“As long as inflation continues to decline and the economy remains calm without collapsing,” Jones said, “it puts us in a very nice Goldilocks scenario (for the market).”

Red Sea crisis disrupts global trade

Attacks on container ships in the Red Sea have wreaked havoc on one of the world’s most important trade routes for weeks, and shipping giant Maersk warned on Thursday that the disruption could last up to a year.

Iran-backed Houthi fighters stepped up their attacks on ships in late November in retaliation for Israel’s war against Hamas.

The resulting delays and additional costs for shipping companies have raised concerns that consumers, who are still struggling after a long period of inflation, could be hit by further price increases, my colleague Anna Kuban reports.

Richard Meade, editor in chief of shipping trade publication Lloyd’s List, told CNN there has been an “almost mass exodus” of large container ships from the Red Sea and the nearby Suez Canal. These ships, which deliver everything from sneakers to mobile phones from Asian manufacturers to European customers, have taken longer routes to avoid the region.

That migration is a big problem: The Suez Canal, which connects the Red Sea to the Mediterranean, represents 10% to 15% of world trade, including oil exports, and 30% of the world’s shipping volume. Container.

Yellen: It’s ‘clear’ that vacant office buildings will create banking stress

Treasury Secretary Janet Yellen said Thursday that the large number of vacant commercial properties will create some pressure on smaller banks.

However, he does not believe they pose any systemic risk to the country’s financial system, my colleague Alicia Wallace reports.

In her annual appearance before the Senate Banking Committee, Yellen told lawmakers that the exposure of big banks is “very low,” but there may also be smaller banks that are facing stress related to high building vacancy rates. offices, high interest rates and falling valuations.

“It’s clear that there will be stress and harm associated with this,” Yellen said.

“It will be a concern for some banks, but overall the system is well capitalized,” he said, noting that overall the U.S. financial system is strong.

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