U.S. Dollar Hits 13-Month High as Goldman Says AI Boom Is Also a Factor

[Financial News]  

The value of the United States dollar (USD) surged to its highest level in 13 months on June 30 local time. Even as the Japanese yen weakened sharply, the dollar continued to gain on expectations that the Federal Reserve System (Fed) will raise interest rates.
According to Yahoo Finance, the US Dollar Index (DXY), which measures the dollar against major currencies, was trading at 101.24 around 1 p.m. Eastern time, up 0.1% from the previous session. That put it close to the 13-month high of 101.80 set on the 24th.
The dollar index has risen 3.1% so far this year. About two-thirds of that gain came over the past month, driven by the yen's slide and stronger expectations of U.S. rate hikes.
Another factor cited was the strength of U.S. technology stocks amid the AI boom.

The first reason behind the dollar's strength is the weakness of the Japanese yen.
The yen fell to its lowest level in 40 years, since 1986, after briefly weakening past 161.95 per dollar on the morning of the day.
The yen failed to recover even after the Bank of Japan (BOJ) raised its benchmark rate from 0.75% to 1% in early June. The higher rate remains far below those of other advanced economies. As a result, investors have been selling yen and moving into dollars and other currencies instead of unwinding yen carry trades despite the rate hike.
A yen carry trade refers to borrowing in yen, where rates are low, and investing in higher-yielding assets such as dollars.

The second pillar supporting the dollar is the outlook for higher U.S. interest rates.
With no major unwinding of yen carry trades, the dollar has more room to rise. That is because the Federal Reserve under Chairman Kevin Warsh is preparing to raise rates.
The Fed kept its benchmark rate unchanged at 3.50% to 3.75% at its Federal Open Market Committee (FOMC) meeting on June 16-17, but signaled the possibility of a rate hike later this year.
Markets see it as almost certain that the Fed will raise rates by 0.25 percentage point by the end of this year. They also assign more than a 60% chance to a second hike in March next year, as inflationary pressure continues to build.
The core Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, rose 3.4% in May from a year earlier, marking its highest level since October 2023.
Fed rate hikes tend to boost demand for dollars because dollar-denominated assets offer higher returns.

Goldman Sachs foreign exchange strategist Lexi Kanter said there is a third pillar supporting the U.S. dollar's strength, adding that the AI boom is another force lifting the currency.
As U.S. technology stocks rise during the AI boom, foreign investors are buying U.S. shares, which in turn increases demand for dollars.
Kanter said, "Given these positive factors, the dollar's rise has actually been somewhat modest."
Against this backdrop, the dollar has been on a six-month winning streak against the euro, British pound sterling, Swiss franc and other major currencies.
Kanter said, "If the Fed signals the possibility of a rate hike, especially by pointing to the need to do so in light of heavy AI-related spending, the dollar rally could gain momentum."
He added, however, that the market may be overestimating the likelihood of a rate hike, confidence in the Fed's independence has weakened, and slower U.S. economic growth later this year could pose risks to the dollar.
Meanwhile, the Korean won closed at 1,549.50 per dollar at 2 a.m. on July 1, Korea time. That was up 0.10 won from the session's closing level of 1,549.40 won.

dympna@fnnews.com Song Kyung-jae Reporter