The US dollar has been exceptionally strong this year, as higher interest rates in the US and investors seeking a safe haven have meant that demand for US dollars has been high. The dollar has gained 22% relative to sterling this year, 17% relative to the euro, and 26% relative to the yen – all major currencies in global finance and trade. The dollar index – which measures the performance of the dollar against a basket of its major trading peers – has increased by 18.3% in 2022.
The chart opposite shows how far the US dollar has deviated from the 30-week moving average. As of the latest reading the dollar index was 8.3% above its 30-week moving average.
This reading puts it in the 97th percentile – i.e., only 3% of observations have been higher (either positively or negatively). Such strength in the dollar is unusual.
We examined the US dollar’s historic performance each time it reached this level of deviation from the 30-week moving average (just analysing positive deviations). There have been 60 instances, historically, when the positive deviation from the 30-week moving average has been 8.3% or higher. Over the following 1, 3, and 6 months, the dollar has subsequently weakened by an average of 1.0%, 1.7%, and 3.6%, respectively.
On balance then, the historical evidence suggests that the US dollar may tread water or weaken from here – although, as ever, history is just a guide!
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