The authors are economists from Shinhan Investment Corp. They can be contacted at [email protected] — Ed.
The USD may continue to rise even after the recent rise in value
The value of the USD rose sharply, with the US Dollar Index (DXY) jumping almost 110 points in September, up more than 20% from the lows of 90 points reached during the economic recovery after an aggressive injection of cash at the start of the pandemic. The rebound of the dollar was fueled by: 1) the differentiated impact of the energy crisis on certain countries; 2) relative weakness of the manufacturing sector; and 3) the divergence of monetary policies among advanced economies. Although monetary policies are now starting to converge, we see no signs of the USD losing its bullish momentum anytime soon.
Instead, the global energy crisis and weak manufacturing activity could drive the USD even higher going forward. Net energy importers in Asia and Europe will find themselves at a disadvantage relative to net energy exporters in the United States as long as the energy crisis triggered by the Russian invasion of Ukraine persists. As pent-up demand due to the pandemic shifts from goods to services, the manufacturing sector remains relatively weak relative to the service sector and demand for cyclical goods is expected to suffer as the global economy slides into recession.
Reasons to be concerned about the strength of the dollar
Periods of USD strength since the 1980s include the Latin American debt crisis of the early 1980s, the Asian financial crisis of the mid-1990s, the 2008 financial crisis, and the CNY shock period of 2015. Unlike in the past, financial uncertainties remained mostly localized amid the recent rise in the value of the dollar, thanks to relatively healthy conditions in emerging economies, decent global demand and limited international capital flows. Financial crises, however, have usually been triggered when economic fundamentals have been affected. With trade expected to come to a halt due to slowing demand from 4Q22 and US rate hikes coming to an end, massive capital outflows are now a concern for countries across Asia and from Europe who recorded entries during the pandemic.