USD exchange rate is about to skyrocket, weighing down the Yen

The Bloomberg Dollar Spot Index rose for a fifth straight day, posting its biggest gain since February 2023. As tensions in the Middle East weigh on commodity prices and the U.S. economy, many markets are concerned about the dollar's position.

The US Federal Reserve is not expected to start easing policy until September. Last week, the Fed was expected to cut interest rates in July. The re-pricing comes after a series of unexpectedly strong US inflation readings changed market expectations.

The prospect of higher US interest rates is weighing on the global monetary system as central banks in developed countries begin to ease monetary policy. A stronger dollar has hurt other G10 currencies this year, especially the yen.

“The Fed will eventually have to cut rates, otherwise the global economy will be at a disadvantage,” commented Nathan Thooft, global chief investment officer of multi-asset solutions and senior portfolio manager at Manulife Investment Management.

The International Monetary Fund has raised its forecast for global economic growth this year, with the U.S. economy leading the way. The IMF also warned that the outlook for the world economy remains weak amid persistent inflation and rising geopolitical risks. Data on Tuesday showed U.S. industrial production rose for a second month, boosted by a larger-than-expected increase in factory output.

“It’s hard to argue against the dollar’s bullish bias right now,” Chris Turner, a currency strategist at ING Groep NV, wrote in a note. He expects the dollar’s benchmark to continue rising and head toward its October high.

Institutional inflows into the greenback in the five days to April 11 hit their highest level since November 2022, according to State Street custody data. Asset managers in particular sold the euro, adding to growing expectations of an upcoming rate cut by the European Central Bank.

“The surprise data has reinforced speculation that interest rates will eventually diverge, with rates falling across European economies in the summer, but probably not in the US,” said Michael Metcalfe, currency strategist at State Street Global Markets.

The Yen exchange rate is currently at 154.74 USD/JPY - continuing to surpass a 34-year peak.

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