U.S. Dollar Rises as Economy Grows Against Turbulent Backdrop
Investors continued to buy dollars Tuesday as measures by policy makers in Argentina, which has raised its interest rates to 60%, failed to assuage concerns about emerging-market currencies. The rout has been fueled by worries that many of these countries have accumulated too much dollar-denominated debt, and may not have currency reserves sufficient to protect them from investor runs, analysts said.
These concerns are being exacerbated by expectations for the Federal Reserve to continue aggressively raising interest rates and by tensions between the U.S. and its major trading partners, which threaten to slow the pace of global commerce. Rising interest rates typically attract investors to a currency.
When emerging-markets economies have borrowed heavily in dollars, investors tend to focus on “how much reserves are available to backstop the system,” said Brian Daingerfield, a strategist at Natwest Markets.
The dollar maintained its gains after the Institute for Supply Management said Tuesday that its manufacturing index rose to 61.3 in August from 58.1 in July. Numbers above 50 indicate activity is expanding across the manufacturing sector. Economists surveyed by The Wall Street Journal had expected a 57.5 reading for August.
The unexpectedly strong reading led to a surge in investor expectations that the Federal Reserve will be able to raise interest rates at least two more times this year. Policy makers have raised rates twice this year and have penciled in two more increases.
Fed funds futures, which investors use to bet on the direction of central bank policy, early Tuesday showed a 75% the probability the Fed will raise interest rates at least two more times this year, compared with 67% a month ago.
Fed tightening has contributed to the turmoil in emerging-market currencies this year, which have been steadily declining against the U.S. dollar this year. The Fed has been shrinking its balance sheet, pulling money out of the financial system as it has increased its forecasts for the number of times it will raise rates this year and in 2019. At the end of 2017, policy makers had penciled in three rate increases for this year and two next year. They’ve since increased those projections by one more in each year.