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USD may lose its supremacy

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At the time of crisis, the US dollar becomes the main safe-haven asset in which investors are ready to put money in. Now, most traders prefer buying the asset. However, analysts are warning that the market conditions may change if the overall situation worsens.

Experts emphasize the non-stop growth in the greenback, which began in the middle of 2021. The increase was mainly driven by the expectations of monetary policy tightening by the Federal Reserve. The regulator met the expectations in March 2022 by launching the process of the key interest rate hike. In this light, the US dollar became even stronger. The process presupposed the withdrawal of liquidity through the ending of the quantitative easing (QE) program.

Under the current conditions, the US dollar index showed an unprecedented rise. On September 28, it reached the level of 114.50. Such a reading was last seen 20 years ago in 2002. Now, the US dollar index, which measures the greenback against the basket of six major currencies, hit a new 20-year high, but it is not the limit. The soar could be explained by the Fed’s aggressive monetary policy aimed at capping inflation.

Other central banks are also hiking benchmark rates. This, in turn, has led to a wider gap in interest rates between the US market and the debt markets of other countries. That is why investors are withdrawing money in favor of the US dollar. Notably, the greenback is still serving as the main safe-haven currency.

Currencies that are pegged to the US dollar, including the Hong Kong dollar, are benefiting from the situation. While the Swiss franc is the most stable currency at the moment, currencies of emerging countries are depreciating against the greenback faster than others. Thus, the Chinese yuan has recently collapsed to a fresh 14-year low against the US dollar.

Analysts suppose that the uptrend in the US currency will continue in the next few months. It is expected that the greenback will advance against the euro, the pound sterling, the Japanese yen, and some other currencies. However, the actions of the Bank of China may confuse all the cards of the United States. The Chinese regulator may intervene in the currency market if the yuan drops significantly.

Analysts think that China could even destroy the well-established US dollar system. Although China is actively selling off US treasuries, it is very hard to predict how the situation may develop. The fact is that such measures could be defined as the first step towards dedollarisation.

Funds received from the selling of the US treasuries could be allocated for economic development or other global projects. This will allow the country to become more influential in the global arena.

Notably, APAC currencies pegged to the US dollar, including the Hong Kong dollar, the dirham, or the rial, are the most resilient to the existing conditions. Meanwhile, currencies that have a delayed reaction to financial market changes or currencies of the countries that fail to keep up with the general trend of monetary policy tightening (the euro or the Chinese yuan) will be among the losers.

Most analysts suppose that in the next few years, the global financial market will hardly alter considerably. The reason lies in the current financial processes that correspond to a traditional model of exchange rate formation.

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