For now for this discussion, I will use the DXY Index since it’s the most commonly used in the markets
It is a weighted geometric mean of the dollar’s value relative to the following select currencies:
I already did a small post here, outlining that the dollar had a very significant 7% rally since July, and that due to the importance of the dollar around the world for all type of transactions, this is probably going to put additional constraints on global liquidity.
Since then, the DXY is having a bit of a decline, but the point is still valid, especially if in the near term the dollar continues on a path higher. The best scenario could be to see it at least stabilize.
IMO the current rise in treasury yields we are experiencing, along with a better economic outlook for the US than for other developed economies (especially with the data released during Q3) could be among the reasons.
I recently saw this photo, which shows the dominance of the dollar in payments, and the increase it has recently
And this chart from JPM, shows while the dollar has a lost share in global exports, is still extremely dominant in FX volume.
Looking at FX volumes, the dollar’s share stands at 88%, near record highs, while its share of trade invoicing, cross-border liabilities and foreign currency debt issuance has held steady over the last two decades. “The dollar’s transactional dominance remains top-of-class despite secular declines in U.S. trade shares. On the other hand, de-dollarization is evident in FX reserves, where the dollar’s share has declined to a record low of 58%,” Chandan noted.
Good analysis. I agree with higher yields and relatively strong U.S economic developments as major reasons for the recent dollar strength.
When it comes to transaction volume through Swift I think the decline in international Euro transactions could be caused by the fact that Europeans are increasingly using another network (SEPA) which is supporting real-time transactions esp. since 1-2 years but we could look into that transaction topic separately at one point to understand international money flows better.
Foreign Currency Reserves, is another data point where the dollar is clearly still very dominant. Even if its share has been declining, 12 percentage points—from 71 to 59 percent—since the euro was launched in 1999
