The PKR’s downward spiral continues, with the currency losing 96 paise against the US dollar in interbank trading



A gain that has the dollar on track for its greatest year since 1984, traders and experts believe, has further to run, implying greater pain practically everywhere else as other currencies either collapse or require quick rate hikes to remain put.


The advance – the dollar is up over 15% versus a basket of currencies this year — has already wreaked havoc on foreign exchange markets, smashing the euro and yen to two-decade lows and sending sterling to its lowest level in nearly 40 years.


Investors are pricing in greater and quicker US rate hikes in response to Tuesday’s surprisingly strong US inflation figures, and are even betting that the Federal Reserve could boost by a full percentage point next week.


Such a forecast, as well as market support for the dollar, poses a direct challenge to global central banks, who must choose between seeing their native currencies decline or halting the process by selling dollars or hiking interest rates, risking a significant slowdown in economic development.

“I don’t think there’s anything that can stop the dollar as long as US interest rates rise,” said Rabobank strategist Michael Every.


“There will be sporadic periods where the market may try to mislead itself and believe that what is occurring isn’t happening,” he said. “However, we believe the dollar will be much higher by the end of the year.”


The US dollar index, which measures the greenback against a basket of six major currencies, was at 109.60 on Wednesday, just below the 20-year high of 110.79 set in early September. Its year-to-date increase falls barely short of 1984’s full-year gain of 14.9 per cent.

The dollar has gained over 14 per cent versus the euro this year, 17 per cent against sterling, and nearly 25 per cent against the yen.


Interest rates have been a crucial factor since rising rates provide appealing yields on dollar bonds and deposits.


Outside of the United States, major economies’ interest-rate paths have been less aggressive, or have been starkly different.


Only last week did the European Central Bank discuss “front-loading” rises. China is lowering interest rates, while Japan maintains them at zero. According to analysts, safety and the relative strength of the US economy give further tailwinds.

“We would need to see some of these variables reverse to see the dollar decline from here,” said Alex Wolf, Asia head of investment strategy at J.P. Morgan Private Bank.


“We believe the dollar’s near-term gain is likely to continue, and we continue to recommend clients to hedge their non-dollar exposures.”


The dollar’s protracted climb is becoming unsettling for trade partners, as rising dollar-priced import costs coincide with the world’s struggle with runaway inflation.


The biggest concern is in Asia, where commodity-importing nations like South Korea and India have seen severe selling pressure on their currencies, and China is battling to keep the yuan from falling further.


The Japanese yen, on the other hand, has been the largest loss. The failure of the Bank of Japan to abandon its strategy of compelling bond yields to remain near zero while US rates increase rapidly has left the yen as the primary corollary of dollar gain.

“You have two extremely strong central banks.” “One is rising, while the other is falling,” explained Bart Wakabayashi, branch manager at State Street in Tokyo.


“What is the result? The currencies will begin to diverge. Until that changes — either the Fed starts to come down or the BOJ starts to come up — this should continue,” he added, predicting a yen drop to 147 per dollar.


The yen recovered from a 24-year low on Wednesday on news that the Bank of Japan performed a rate check-in apparent preparation for rare currency intervention, though investors felt the reprieve would be brief.

To be sure, the dollar’s surge will inevitably come to an end, and not everyone believes it has much further to grow.


Positioning data suggest that the market is long dollars, but not significantly so by historical standards, and analysts believe that hiking US interest rates, which is intended to slow the economy, is ultimately a dollar negative.


“If the Fed wants to reduce inflation, it must slow the US economy.” They have only removed accommodation. “They haven’t adopted a restrictive policy,” said Rob Carnell, Asia-Pacific director of research at ING.


But, with the date and character of the dollar’s inevitable decline unknown, most people are avoiding it.

“Right now, we’re seeing huge bids in the dollar,” said Shafali Sachdev, Asia head of FX, fixed income, and commodities at BNP Paribas Wealth Management in Singapore.


“It continues to be supportive of the dollar in the short term since the market is repricing views of the Fed’s policy path, and the expectation of a Fed rate shift moves lower.”

Hassan Rajput

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