Rate hikes by global central banks may arrest the dollar appreciation

Need for a concerted intervention by central banks to reduce currency losses

by Suman Gupta

Mumbai, 17 October 2022: Emkay Wealth Management, the wealth management and advisory arm of Emkay Global Financial Services has released a note on the rally in the USD and its impact on currencies worldwide.

The US Fed has been increasing interest rates at a record pace to control inflation. The inflation rate in the US has shot up to 8%, a figure that was last seen four decades back. The Fed has hiked rates by 300 bps this year and is likely to hike further in its meeting next month. This has brought the focus to the US Dollar. The rate hike has led to an appreciation of the greenback.

The US Dollar continues to dominate the currency markets and it shot up to decadal-high levels. The Dollar Index moved up from 108.60 to 114.50 levels in a short span of just two days. The hike in the US official rates and the assertion of the Fed that the tool of rate hikes will be used consistently till the inflation is brought down to acceptable levels.

This reaffirmation of the stance resulted in dollar buying across the major currency counters. The worst affected by the dollar’s bullishness were the Euro, Japanese Yen, and the Yuan, and thereafter the Pound Sterling. The advance made by the Dollar against the Yen and Euro pushed both currencies to historically low levels.

However, in the light of tighter monetary policy being pursued by other major central banks, the appreciation of the Dollar may happen at a slower pace compared to what it has been so far. The emerging market currencies too have depreciated and witnessed outflows due to the selling of assets by overseas investors.

Due to widespread currency losses and the ineffectiveness of central bank intervention, there is a prominent view that there is a need for concerted intervention by central banks which could be more effective. This stems from the fact that there is a realization of the need for currency stability.