The euro has dropped 12% this year. On Tuesday, it hit parity with the US dollar for the first time in 20 years as fears about the region's economy — stoked by Russia's war in Ukraine — push investors to dump their holdings. The pound has retreated toward levels seen during the worst days of the pandemic.
The dollar's ascent began in anticipation of interest rate hikes by the Federal Reserve, which make the United States a more attractive place to park cash. But in recent weeks, the dollar has dominated for other reasons.
First, there's its reputation as a safe haven investment. When anxiety builds about the health of the global economy, and the likelihood of a recession increases, investors rush to scoop up dollars as a store of value.
"In the current atmosphere of risk aversion in markets, the US dollar rally is likely to continue in the near term," Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a recent research note.
Other traditional safe haven currencies aren't getting the same boost. The Swiss franc is up nearly 8% this year. Japan's yen has been volatile and recently hit its weakest level against the dollar since 1998.
That's in part because the US economy looks stronger than its peers, another major driver of the dollar's climb.
Europe is dealing with a growing energy crisis that could make it much harder for the European Central Bank to fight inflation. Some officials are worried that the crucial Nord Stream 1 pipeline from Russia to Germany, which is closed for routine maintenance, may not restart as normal later this month. That could force governments to make emergency interventions.
"A scenario where the euro area has to ration gas supplies to industry — if that's not an economic crisis, what is?" Jordan Rochester, currency strategist at Nomura, said Tuesday. He predicted the euro will keep falling.
The United Kingdom, meanwhile, is paralyzed by a political vacuum as the race to replace Boris Johnson as prime minister kicks off, and Japan appears locked in to super-easy monetary policy, opting to prop up the economy instead of putting a lid on price increases.
What it all means: A stronger dollar gives Americans more spending power when they're outside the country. But as Wilson noted, it's not necessarily a good thing for stocks, since it eats into the value of Corporate America's international sales and profits.
US firms generate about 30% of their sales abroad, he calculated. And at a time when they're already dealing with the effects of inflation, extra inventory and shifts in demand, it's an additional drag.
"This dollar strength is just another reason to think earnings revisions are coming down over the next few earnings seasons," Wilson said. "Therefore, the recent rally in stocks is likely to fizzle out before too long."
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