The dollar index today (DXY00) climbed to a 1-1/2 month high and is just below July’s 20-year high.  The dollar remains underpinned by recent hawkish Fed commentary that signals the Fed will maintain its aggressive rate-hike cycle to combat inflation. Also, the potential for the global economy to fall into recession has sparked safe-haven demand for the dollar.

Currencies worldwide are feeling the wrath of the strong dollar.  The euro (^EURUSD) sank to a 20-year low today, the Japanese yen (^USDJPY) is just above last month’s 24-year low against the dollar, the South Korean won dropped to a 13-year low today, and China’s yuan (^CNYUSD) slid to a 2-year low against the dollar today. The dollar’s rally seems to have legs, with risks of hawkish comments from Fed Chair Powell this Friday at the Fed’s annual Jackson Hole symposium.

The dollar can actually seen strength during periods of both U.S. economic strength or recession. Brown Brothers Harriman said, “if risk-off impulses ebb, the dollar should continue to benefit from the relatively strong U.S. economic outlook and heightened Fed tightening expectations.” Potential drivers for additional dollar gains are numerous.  FP Markets said, “until there’s a dramatic shift in fundamentals and rhetoric with the Fed, you’d definitely be foolish to sell the dollar when the whole world is so nervous.”

JPMorgan Chase predicts EUR/USD will tumble to $0.95 by year-end.  Also, RBC Capital Markets forecasts the British Pound (^GBPUSD) to fall 5% by year-end to the $1.11 level. Hedge fund positioning is behind these moves.  Last Friday’s weekly Commitment of Traders data (COT) shows hedge funds increased their net-short positions on the euro to a 3-week high and that bearish bets on the British Pound rose to a 2-1/2 year high.

The dollar’s meteoric rise is even more damaging to emerging market currencies, where central banks have already collectively burned through the equivalent of more than $2 billion of foreign currency reserves every weekday to bolster their currencies. India, Thailand, and South Korea have seen their reserves plummet by a combined $115 billion this year.  RBC Capital Markets said the dollar’s strength “can continue to run through the rest of this year and probably into early next year.”

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• Stocks Sink as the 10-year T-note Yield Climbs Back Above 3%
• Dollar Gains on a Hawkish Fed