U.S. dollar to remain dominant while inflation rises

The U.S. dollar has continued to gain strength against the currencies of other major economies as the Federal Reserve pushes ahead on its aggressive tightening path. 

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“The U.S. dollar has been extremely strong by historical standards,” said Luc de la Durantaye, chief investment officer at CIBC Asset Management, calling it “one of the most overvalued currencies in our universe.”

The U.S. economy has been less affected than others by geopolitical tension, and it’s also more resilient, which has boosted the currency, de la Durantaye said. Europe, for example, is facing an energy crisis as it is much more dependent on energy exports than the U.S.

The Fed is also contributing to the strong dollar with its aggressive monetary policy compared to Europe, China and Japan, he said, and that should continue into the foreseeable future. 

Also driving the dollar is relatively sticky inflation in the U.S. compared to countries such as China, where inflation is closer to the central bank’s target, de la Durantaye said. And given ongoing geopolitical tension in Europe as well as uncertainty in China, the U.S. dollar has been a safe haven.

The Canadian dollar has also been on the stronger side, helped by its neighbour. Although the loonie has depreciated against the U.S. dollar, it has appreciated against other currencies such as the pound, the euro and Australian and New Zealand dollars.

De la Durantaye expects the current environment to prevail until we see a peak in inflation. At that point, when the Fed signals it’s prepared to pause its rate hikes, “that may trigger some profit–taking in U.S. dollars” he said. “But we’re not quite there yet.”

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Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.