In Thursday’s trading, the US dollar is trying to recover from the losses it experienced the previous day, as it recorded a slight rise against most major currencies. The move comes amid a public holiday in the United States to celebrate Thanksgiving, which led to the closure of stock and bond markets on Wall Street, while these markets will resume activity tomorrow in a brief session.
At the same time, the US Department of Commerce published a report on Wednesday indicating an increase in the Personal Consumption Expenditure (PCE) price index by 0.2% m/m and 2.3% y/y, which is in line with expectations. Despite the increase in the annual rate from 2.1% in September, the index remains within the expected range, reflecting relative stability in price pressures..
Against these developments, the dollar index rose 0.1% to 106.1 points by 17:49 GMT. The dollar also hit a high of 106.4 points and a low of 106.1 points. Despite the dollar’s attempts to recover, the euro is trending lower, suggesting continued volatility in global financial markets under these volatile economic conditions. Moreover, the financial corporate sector, such as banks, may benefit from a rise in the dollar if it leads to an increase in interest on loans and deposits.
Overall, the relationship between the rise of the dollar index and stock markets remains complex and multidimensional, and the impact depends on many economic and political factors, including the Fed’s decisions and the pace of global economic growth. A stronger dollar could enhance the attractiveness of investing in US assets for foreign investors, which could support demand for US equities.
The impact of the rise in dollar on stock markets
The rise in the US dollar index significantly affects the stock markets and is one of the main factors contributing to global market movements. When the dollar index rises, it reflects an increase in the value of the US currency against other currencies, which can have dual effects on stock markets. One of the main influences is that the stronger dollar increases the cost of U.S. goods and products relative to foreign markets.
This could reduce demand for U.S. exports, negatively impacting the profits of U.S. companies that rely heavily on international markets. Multinationals that generate a large portion of their revenue outside the United States may find themselves in a difficult position, as their foreign currency returns become less valuable when converted to dollars.
On the other hand, a stronger dollar may also affect the liquidity of financial markets. As the dollar appreciates, investments in dollar-denominated assets become more attractive to foreign investors, resulting in money flowing into U.S. bonds or stocks in local markets. However, this may lead to capital flight from developing markets that may suffer negative effects as a result of the high cost of borrowing in foreign currencies, as the rise in the dollar increases the cost of dollar debt.
A stronger dollar could also be reflected in interest outlook. If markets expect a stronger dollar to lead to an acceleration in inflation or an increase in economic pressures, the US Federal Reserve may take steps to adjust monetary policy. If the Fed decides to raise interest rates to counter inflation linked to the appreciation of the dollar, it could lead to a decline in stock markets as financing costs for companies are increasing.
The impact of the dollar index on monetary policy
The rise of the US dollar index is one of the important factors affecting monetary policy in the United States. When the dollar index rises, it indicates an increase in the value of the US currency compared to other currencies, which can have significant effects on the economic decision of the Federal Reserve. The impact of this rise depends on several factors, including the domestic economic situation, inflation, economic growth, and global conditions.
One of the main effects of a stronger dollar is that it may contribute to reducing inflationary pressures. A stronger local currency usually leads to a lower cost of imports, including goods and raw materials, which mitigates domestic inflation. In this context, the Fed may see the appreciation of the dollar as providing a suitable environment to keep monetary policy tight or even decide to raise interest rates, in an effort to limit inflation that may be caused by high domestic demand or from global pressures.
On the other hand, a stronger dollar can have a negative impact on the US economy in general, especially in the case of companies that depend on exports. The appreciation of the dollar makes US goods more expensive in foreign markets, reducing demand for US exports.
This decline in demand could negatively affect the growth of the economy, which could prompt the Federal Reserve to reconsider interest policy to avoid an economic slowdown. In such cases, The Fed is more inclined to keep interest rates low to stimulate economic growth and minimize the impact of a stronger dollar on exports. Moreover, the rise of the dollar is also a challenge for countries that rely on debt denominated in US dollars.
