The US dollar’s been on a roll in the past year: you can see from the black line above that the Bloomberg Dollar Spot Index – which tracks the greenback against a basket of major and emerging market currencies – has been on the up and up for the past year. And there’s good reason to believe this roll isn’t going to slow down anytime soon.
You can tell as much by looking at the “net foreign currency exposure to US dollars” (the gray bars above). This metric essentially looks at the total value of bets investors are making on whether the US dollar will get stronger or weaker. And right now, investors are betting a net $16 billion that the dollar will keep rising – about three times more than a few months ago. It’s easy to see why: the US Federal Reserve (the Fed) has launched its most aggressive interest rate hikes in decades, increasing demand for the greenback among foreign investors and savers.
Now, those bets aren’t proof in and of themselves that the dollar will keep rising. But here’s the kicker: this $16 billion bet is still a far cry from the most extreme position investors have taken in the last few years – a net $36 billion bet in 2019. So while a lot of investors have undoubtedly been flocking to the dollar, there’s still plenty of room for more to jump in and push the value of the currency even higher. That’s especially likely to happen after US consumer inflation just hit a 41-year high in June, leaving the Fed now scrambling to play catch-up.
Of course, it’s also worth keeping in mind that the dollar’s strength will impact certain stocks disproportionately. So steer clear of US companies that earn a significant part of their revenue overseas, like Big Tech: anything they make will be worth less when they exchange it back into US dollars, after all.
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