The mighty U.S. dollar is making a comeback. According to analysts at Deutsche Bank AG., the world’s second-largest currency trader, the greenback’s three-week rally is just the beginning and that the currency’s strength should continue for some time.
George Saravelos, co-head of global foreign-exchange research for the bank in London strongly suggests that investors purchase the U.S. currency and stay away from emerging markets such as China, Mexico and South Korea because they rely far too little on Fed expectations.
Some analysts are saying that these—and other-emerging markets-- are likely to slump versus the dollar, while the performance of the greenback versus the euro and yen depends on the decisions of the Fed.
The probability of a Federal Reserve interest rate hike at its next meeting in June helped send the dollar to a seven-week high last week and was positively received by the financial figures meeting at the G7 gathering in Japan over the weekend.
Dollar Up 0.8%
The Bloomberg Dollar Spot Index, which tracks the dollar versus 10 peers, added 0.8 percent this week with the greenback moving up 0.8 percent to $1.1224 per euro and gaining 1.4 percent to 110.15 yen. In fact, the US Dollar rose against almost every major currency in the world.
The dollar had slumped 12 percent versus the yen, 7 percent versus the euro, and 7 percent against other major currencies before turning higher this month. April numbers indicated that investors are turning bearish on the currency for the first time since 2014.
The surprising strength of the US retail sales report for April and other positive second-tier data contrasted to the disappointing industrial production figures in the Eurozone reported at the end of the week and should go a long way towards allaying worries about a faltering economy.
After the minutes from the last FOMC meeting were revealed last week, Federal Reserve officials from several locations—Richmond, New York and Boston—hinted strongly at a rate hike as early as June. There are, however, divergent theories about the gap between FOMC member’s expectations of interest rate hikes in the US and that being currently priced in by financial markets, with some bankers pricing in less than a 5% probability of a rate increase at the Fed’s next meeting in June, far below the numbers factored in by others.
Market analysts say that pricing for a hike next month stands at a 30 percent likelihood and 73 percent for a hike by the end of the year.