Global tensions point to stronger U.S. dollar

These days, mitigating exchange risk should be a primary concern of exporters and importers.

The currency market is under severe pressure due to the unresolved situation in Eastern Europe, a larger than expected economic decline in China, and unclear interest rate messaging coming from the US Federal Reserve (the Fed).

The situation in Eastern Europe is having an appreciation effect on the USD. The USD is considered a “safe haven” due to its ease of exchange, liquidity and popularity.

Therefore, its demand rises during times of insecurity. The USD will appreciate against major currencies if the situation in Eastern Europe becomes more violent. As a consequence, the CAD dollar in the USD/CAD pair will weaken even further.

The decline in the Chinese economy puts depreciation pressure on the loonie, due to slower demand for our natural resources. China has become a sensitive gauge of the world economy and bad news from that country usually has negative impacts on our dollar.

US interest rates
The Fed’s unclear message regarding rising interest rates puts the Fed’s forward guidance into a standstill. The timing of interest rate raises in the US is under debate by politicians, economic authorities and a variety of businesses and organizations as they strive to maintain a balance between economic development and fear of high inflation.

Right now, the unemployment and inflation data have reached a level where you would expect the Fed to raise interest rates. However, Fed has chosen a ‘wait and see’ approach. A decision to raise interest rates will cause the USD to appreciate even further.

Overall, the ongoing tension in currency markets signals the transition from lower fluctuation to more violent currency movements—patterns exporters and importers will want to carefully monitor.

Darek Wozniak is president of JW Investrade, a currency exchange consulting firm in London, Ont. He may be reached via email.