A resurgent US dollar is exasperating central bankers and governments around the world, forcing them into action to relieve the pressure on their own currencies.

From Tokyo to Istanbul, policymakers are stepping in to defend exchange rates with both words and deeds as a resilient American economy conspires to keep the greenback strong by pushing back expectations for lower US interest rates.

The greenback has gained against virtually every major peer in 2024, defying many on Wall Street who came into the year predicting a dollar selloff. That’s prompted escalating warnings from Japan on its readiness to intervene to buoy the yen from near a 34-year low. Turkey blindsided markets with a rate hike to boost the lira, China and Indonesia have moved to steady their currencies, while Sweden and India are also under pressure.

Those intensifying efforts are reminiscent of 2022 when officials in Switzerland and Canada lamented their weakening exchange rates amid a surge in inflation and the strong dollar ripped through emerging economies, contributing to Sri Lanka’s historic default. Today, countries burdened by foreign debt remain at risk, with the Maldives and Bolivia particularly vulnerable if dollar strength persists. 

“The US dollar keeps turning up the heat on other central banks,” said Helen Given, a foreign-exchange trader at Monex. “Given the current global environment where central banks appear to be looking to end their tightening cycles, there doesn’t seem to be a safe way out from the dollar’s continued dominance.”

Just months ago, a recession in the US seemed all but inevitable. Instead, data show the nation benefiting from a tight labour market, upbeat consumer mood and government subsidies for manufacturing, prompting investors to rapidly reassess their expectations for interest-rate cuts by the Federal Reserve. 

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Traders are now pricing under three quarter-point cuts in 2024, down from wagers for over 150 basis points of easing at the start of the year, helping lift a Bloomberg gauge of the dollar more than 2 per cent this year – and pummeling everything from the Indian rupee to the Nigerian naira, which both fell to record lows. While some heat has come out of the US currency in recent days, the greenback remains up against 28 of its 31 major peers this year.

“This is a story of pure US exceptionalism,” said Stephen Miller, a four-decade markets veteran and consultant at Grant Samuel Funds Management Pty in Sydney. “Buying the dollar remains the number one trade.”

That has the world’s central banks playing defence. 

Japan last week warned of “bold action” to bolster the yen, which remains on the cusp of 152 per dollar – a level that many traders view as a line in the sand. Indonesia has repeatedly intervened in interbank, forwards and bond markets to lift its rupiah. And with China’s yuan at the bottom of its permitted trading band against the dollar, investors are on watch for more forceful pushback, following tweaks to the currency’s daily reference rate. The yuan has acted as a drag on other Asian currencies, including India’s rupee.

Other nations are looking to monetary policy to support their currencies. Turkey unexpectedly hiked interest rates last month, while Swedish officials have said a weaker krona could delay its first move to ease.

“A challenge to the Riksbank’s monetary policy is that US monetary policy seems recently to have had a particularly large impact on the Swedish exchange rate,” said deputy governor Martin Floden according to minutes of its March rates decision published on Thursday. If the currency keeps weakening, “monetary policy may have to remain contractionary for longer,” he said. 

Exchange rates matter because depreciating currencies increase the cost of imported goods, stoking inflation as those expenses feed through to prices in grocery stores and factories. Meanwhile, there’s a higher likelihood that money will pour out of a nation with a weak currency in search of higher yields elsewhere – so-called capital flight – harming domestic investment and growth.

The irony, of course, is that unilaterally intervening in currency markets – where US$7.5 trillion changes hands every day – can only temporarily alter an exchange rate. 

“They’re trying to buy time,” Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA, said of central banks and government intervention in currency markets. “If we start having more doubts about rate cuts by the Fed, then there’s no point in intervening – volatility will go up and the intent will be meaningless.”

While markets still expect the Fed to ease policy this year, not everyone is convinced even that will bring relief in currency markets. 

Central banks are about to embark on their most synchronised rate-cutting cycle since 2008, and such a scenario bodes well for the dollar, as the US policy rate is set to remain one of the highest among major developed economies this year. 

“The other thing besides intervention that we will see, and we’re already seeing, is a willingness to get ahead of the Fed in terms of easing,” said Carmen Reinhart, professor at Harvard Kennedy School and former World Bank chief economist. “I think they’ll be more shy about doing that if they’re worried about the currency.”

With all the jawboning from global policymakers, “we are seeing acknowledgment from central banks that the Fed cuts are not necessarily going to provide a relief, at least from the currency side of things,” said Michael Cahill, a foreign-exchange analyst at Goldman Sachs Group. 

Investors are also buying into that new reality, adding to bets on dollar strength in recent weeks. A gauge of non-commercial trader positions – a group that includes asset managers as well as hedge funds and other speculative market players – is now the most long since 2022, data from the Commodity Futures Trading Commission through March 26 show. 

For Ed Al-Hussainy, it’s all a sign that the strong greenback is here to stay.

“There’s only one developed currency trade to rule them all,” the rates strategist at Columbia Threadneedle Investment said. “Long the dollar.” BLOOMBERG