It was late 2022, and his bets against bonds had paid off after the Federal Reserve’s interest-rate hikes sent markets into a tailspin. So his fund at Jupiter Asset Management, like many others, was placing a popular wager on the next phase of the cycle: As the Fed’s tightening neared an end, it would halt the stampede of cash that raced in to seize on rising rates — and the US currency would fall.
That unexpected resurgence is reverberating around the globe. Investors are now unwinding trades. Officials in China and Japan are moving to protect their currencies. US companies are bracing for a hit to their earnings. And across the developing world it’s evoking painful memories of 2022, when the dollar delivered economic shocks by pushing up the price of commodities in global markets and increasing the burden of foreign debts.
The combination has pushed the Bloomberg Dollar Spot Index back near this year’s highs after a record eight-week rally that began in mid-July. Charles Diebel, the head of fixed income at Mediolanum International Funds, favored a weaker dollar coming into 2023 but pivoted to a neutral stance around the middle of the year as the US economy continued to outperform.
In the US, where a more optimistic profit outlook has helped to bolster share prices, the dollar’s rise is threatening to reduce earnings from abroad. Apple Inc., for example, said the strong dollar has weighed on sales in Europe and Asia, while Walt Disney Co. is expecting it to curb the number of theme-park visitors coming from abroad. Last year, analysts from Credit Suisse Group AG estimated that every 8% to 10% jump in the dollar triggers, on average, a roughly 1% hit to US company profits.
In China and Japan, officials this month signaled a willingness to protect their currencies from further declines. After the offshore yuan closed at a record low, Chinese policymakers pushed back by setting the yuan’s daily reference rates at a stronger-than-expected level and seeking to raise the cost of funding to those betting against the currency.