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U.S. and global recession fears have finally hit the round-the-clock currency market after more than a month of evaluation by traders — sending the dollar to its highest levels of almost 20 years as it jumped versus several rivals on mounting growth concerns.
The ICE U.S. Dollar Index
DXY,
rose 1.5% to 106.69 on Tuesday, the highest level since 2002. The greenback’s pronounced strength indicates that a recession is turning into “more of a global phenomenon, reflecting less places to hide in the world,” said Tom Nakamura, a portfolio manager and currency strategy at AGF Investments in Toronto.
The euro
EURUSD,
Australian
AUDUSD,
and Canadian dollars
USDCAD,
and Norwegian krone
USDNOK,
underperformed by comparison, while emerging-market currencies like the South African rand
USDZAR,
Hungarian forint
USDHUF,
and Chilean peso
USDCLP,
also took a hit. Meanwhile, the Japanese yen
USDJPY,
stabilized.
Read: Euro Dives to a 20-Year Low Against the Dollar. Blame Russia and the ECB.
The currency market is only now coming around to the fears being reflected in the stock and bond markets, which is that central banks will likely be forced to drive rates substantially higher to combat inflation at the sacrifice of growth. Part of the reason for the delay is that markets were still “caught in carry mode,” or the ability to earn profits by borrowing in one currency to purchase another, Nakamura said via phone on Tuesday.
The “real blow” to all that “is the realization that Europe is going to face an energy crisis and not see any relief,” he said. “All the drivers of inflation aren’t going to go away any time soon, recession is now a global phenomenon, and we’re not seeing enough reasons why central banks would slow down in tightening.”
See: Euro to reach parity against the U.S. dollar unless natural-gas crisis ends, Citi strategists warn
The currencies of smaller countries like Australia, Canada and Norway — as well as emerging markets — tend to be more driven by global economic factors, outperforming when growth prospects are bright and underperforming when they’re not.
The yen works in the opposite manner because of its safe-haven status: It tends to do well when traders are most nervous about growth and less so when global growth conditions are good. The yen, however, has fallen sharply against the dollar over much of 2022 as the result of the prospects for rapidly rising rates in the U.S. and the interest-rate differential with Japan, before the currency found stable footing recently.
“Recession fears are now driving currency markets, more than central bank policies or interest rate differentials,” benefiting the dollar, Enrique Díaz-Alvarez, Matthew Ryan, and others at financial services firm Ebury wrote in a weekly report on Monday. “Last week was no exception. As stocks retreated and government bond rates saw record falls, the greenback rose sharply against all its major peers except for the Japanese yen, which seems to be trying to regain its status as a safe-haven currency.”
In past situations, the currency market has actually been quicker to size up certain events than other parts of the market, such as the likely impact of President Joe Biden’s $2 trillion-dollar infrastructure plan last year.
As of Tuesday afternoon, U.S. stocks turned mixed. Dow industrials
DJIA,
were off by almost 500 points, or 1.5%, while the S&P 500
SPX,
was down 1% and the Nasdaq Composite
COMP,
was up by 0.4%. Meanwhile, investors flocked to Treasurys, sending the 10-year rate below 2.8% and inverting the spread against the 2-year rate
TMUBMUSD02Y,
