Central banks around the world are singing from the U.S. Federal Reserve’s hymn sheet – and it could well be a coda to the dollar’s startling appreciation of the past year. The European Central Bank’s surprisingly large half-point interest rate rise; was a milestone for many reasons the first ECB rate rise in more than a decade and the end of an eight-year experiment with negative policy rates.
It certainly seems to be a moment. Speculators, at least, have continued to build their biggest net long dollar positions of the year; close to pre-pandemic levels and at levels typically associated with a cresting greenback over the past 20 years.
But if the dollar’s stellar rise over the past year owes at least something to the assumption that U.S. interest rates. It had greater scope to rise post-pandemic than other G7 economies; Which is in the Ukraine invasion reinforced that then the shifting tones in Frankfurt and London this week; And it could now be highly significant for the exchange rate.
Soundings on the relative economic surprises either side of the pond show the dollar may have priced in much of that already. The dollar’s latest leg higher over the past month coincided with euro zone surprises turning negative in mid-June; Which for the first time this year just as U.S. equivalents troughed at their most negative levels since the pandemic hit.