Dollar Pushes to New Highs—With New Risks

18-Nov (WSJ) — The dollar extended its powerful rally Friday, a move that poses new risks to budding optimism about the economy following the U.S. election.

The U.S. currency moved closer to parity with the euro and higher against the yen. In recent days, the dollar has pushed exchange rates lower for emerging markets around the world.

The dollar is rising fast as investors bet that fiscal spending and tax cuts proposed by President-elect Donald Trump will spur U.S. economic growth, and the rising probability that the Federal Reserve will raise interest rates next month. Federal Reserve Chairwoman Janet Yellen said on Thursday that the Fed could act “relatively soon.”

The gains make foreign goods and travel cheaper for U.S. consumers and could give a boost to exports from Japan and Europe. But they also are reigniting fears that the dollar’s strength could slow U.S. corporate profit growth and intensify capital flight from the developing world, which would complicate the prospects for an economic rebound.

The fast move has set off reactions by monetary officials around the world. Indonesia’s central bank has intervened by selling dollars in hopes of slowing the rupiah’s slide. Malaysia, faced with a deep drop in the ringgit, cracked down on trading in the futures market in an effort to damp speculation on the currency. China intervened as well, setting the yuan for several days but using state-owned banks to prevent the currency from falling too far.

Mexico’s central bank raised interest rates on Thursday as the country grapples with a weaker peso and uncertainty over the future of its relationship with its largest trading partner.

“The strong dollar is destabilizing for markets, for foreign assets, for emerging-market nations that pay back their debt in dollars, “ said Jonathan Lewis, chief investment officer at Fiera Capital Inc. “That’s pretty significant.”

PG View: And a rate hike in December — with a hint of more to come — will only further buoy the dollar.