QNB attributes dollar strength to US economy, Fed performance

QNB has attributed the dollar's strength to the relatively strong performance of the US economy, calling the currency a "safe haven" instrument that was again substantiated by geopolitical turbulence in Europe and Asia.QNB's weekly report has predicted that the advanced economies are likely to remain in a more fragile position in terms of growth compared to the dollar, which will remain high for some time, adding that that the value of the greenback has recently risen, against major currencies to levels not seen in almost two decades, stressing that the US Dollar Index (DXY) has increased 10% since pre-pandemic levels with more 10% a year, and 19% compared to the post-pandemic levels, while this increase encompassed all major currencies, including the euro and the Japanese yen.The report showed that the dollar was supported by high demand from global investors at the beginning of the pandemic, but soon after that, the US dollar depreciated for six months between 2020 May and 2021 January against major currencies when the US introduced economic incentives faster than other economies.But those moves later completely reversed their direction, which led to an even steeper rise in the value of the dollar.This included a rise of 17% against the euro, 24% against the yen, and 13% against emerging market currencies.The report attributed the developments in the value of the dollar to three main factors, the first of which is that US growth differentials were greater than other countries.With a GDP growth of 2.5% since the pre-pandemic levels and a better economic performance, US topped during the same period growth of 1.5% in the euro area and 0.6% in Japan.Similarly, growth differentials between the US and EM (emerging markets) narrowed significantly, pointing to a weaker EM relative performance.Faster relative growth in the US tends to favour domestic investments, attracting capital from overseas.This supports the dollar.The second factor centred on expected real interest rates that adjust the medium-term interest rate by forward-looking inflation metrics, which also moved in a direction that favoured the dollar.This is not only due to the aggressive policy stance of the US Federal Reserve (Fed) but also due to the fact that mid-term US inflation expectations moderated in recent months.In contrast, inflation expectations have been increasing in the euro area and Japan, where central banks are much more constrained in fighting inflation, due to weaker economies and higher debt levels.Thirdly, the dollar's benefits from the rising political and geopolitical risks that are threatening global economic conditions. This makes investor and consumer sentiment vulnerable to negative news, the QNB report said.