Market Insights: Rising U.S. Dollar
Milestone Wealth Management Ltd. - Oct 14, 2022
The U.S. dollar (USD) has made significant gains against other currencies over the past month which has many questioning the reason behind this currency spike.
The U.S. economy continues to perform relatively well compared to its peers with a surprisingly strong job market and a resilient services sector. Adding to this, the strong belief that the U.S. Fed will continue to raise interest rates well into next year has bond yield bets increasing. With limited investment options currently producing acceptable returns for current risk levels, many investors are seeking higher yields on fixed income products. This increase in demand for U.S. bonds has aided in the furthering demand for USD and directly correlated to a more favourable exchange rate compared to other currencies, including the Canadian Dollar.
The Canadian economy has shared much of the same resilience as the U.S. economy, benefiting from a relatively demanding job market. However, the Canadian dollar tends to be more tied to stock prices, economic growth outlook, and commodity prices. Due to these factors, the loonie has been trending down against the greenback.
The impacts of the rising U.S. dollar will be felt on a global level. For those looking to travel to the U.S., the cost has increased to convert to USD. Imports from the U.S. have become more expensive and will continue to have a considerable impact on the Canadian Economy as 49% (as of 2021) of our imports come from the American companies that sell abroad who are seeing profits get pinched due to the higher exchange costs. It will also take a heavy toll on developing nations that have relied heavily on borrowing in USD, costing more now to convert their local currencies for debt payments. As a primary trading partner for the U.S., Canadian exports will become cheaper and could benefit the Canadian economy soon.
How long will the currency spike last? Many economists predict that due to the projected interest rate increases into early 2023, the USD could remain at these heightened levels for a while and may even see further increases into next year. This may be of concern for those looking to travel to the U.S. in the future and be wise to seek alternative destinations where the Canadian Dollar can go further.
Sources: BNN Bloomberg, CBS News