Dollar at a New 20-Year High

In global markets, the value of the dollar against a basket of currencies reached a new 20-year high last week, with the exchange rate of the European currency against the dollar sliding to its lowest level in the same period as the eurozone economy faces the threat of recession.

The dollar index, which shows the movement of the value of the US dollar against the other six major world currencies, rose by 1.5 percent last week to approximately 107.00 points, and at one point reached 107.79 points, a new 20-year high.

At the same time, the dollar strengthened by 2.2 percent against the European currency, causing the price of the euro to slide to 1.0185 dollars, and at one point it dipped to 1.0072 dollars, a new 20-year low.

The dollar exchange rate also increased against the Japanese currency by 0.6 percent to 136.10 yen.

The dollar index has risen by more than 1 percent for the second consecutive week, primarily due to the aggressive increase in interest rates by the US central bank. Last week, the minutes from the Fed’s June meeting were released, during which interest rates were raised by 0.75 percentage points.

The minutes showed that central bank leaders agree that key interest rates should be further increased by 0.50 or 0.75 percentage points at the July meeting, given that inflation in the US is at its highest levels in over 40 years, above 8.5 percent.

The money market now estimates that the key interest rate will peak at 3.44 percent in March next year, while it was recently estimated that it could reach 4 percent by May. It currently stands at 1.58 percent.

The Japanese currency, on the other hand, is under pressure from the weakness of the world’s third-largest economy, although the Japanese central bank, unlike most other central banks in the world, continues to try to support the economy with loose monetary policy. On Friday, shortly after the tragic assassination of former Prime Minister Shinzo Abe, the yen strengthened somewhat as it is considered a safe haven for capital in uncertain times. However, it soon came under pressure again.

The euro, on the other hand, weakened as the eurozone economy faces the threat of recession due to the energy crisis. Despite this, the European Central Bank (ECB) will have to raise key interest rates as inflation in that bloc is at record levels of 8.6 percent.

After the ECB raises rates by 0.25 percentage points in July, a larger rate increase can be expected in September, said Ignazio Visco, a member of the ECB’s governing council, last week. Despite the upcoming tightening of monetary policy, the ECB will lag behind the pace of interest rate increases in the US, so further strengthening of the dollar can be expected, and soon one euro could equal one dollar.

– The momentum of the dollar is strong. The chances that the dollar exchange rate will reach parity with the euro in the coming days are not negligible – says Francesco Pesole, a strategist at ING Bank.

Last week, for the second consecutive time, the US currency also strengthened against the British pound by almost 1 percent, a result of the political chaos after several ministers resigned from the government, while Prime Minister Boris Johnson announced his resignation, but not immediately, as demanded by numerous officials of his Conservative Party.

Since the beginning of the year, the dollar has gained more than 11 percent against a basket of currencies.