The Dollar Is the Fortress China Struggles to Breach

If this is what a bad year for the dollar looks like, I'll take it. Widespread predictions of a significant retreat after a bumper 2022 haven't come to pass. The greenback is still the place to be. Not just in good times, but when the rest of the world looks less than enticing. No mere currency, it sometimes resembles a medieval fortress, complete with a moat.

The epic rally last year was always going to be tough to repeat. So it's not too shabby that the dollar is pretty much where it traded on Dec. 31, according to the Bloomberg Dollar Spot Index. This is a product of several forces: The Federal Reserve has laughed interest-rate cuts out of the room, China's rebound has fizzled, and Japan can't decide whether it wants to unwind ultra-loose money or not. The euro area is struggling.

FX Royalty

When in doubt, flock to the buck, especially with the Fed showing few signs of relenting in its inflation fight. Never mind that for years, it has been fashionable to assert that the US is in long-term decline at the hands of China, a view that has come in for some refreshing scrutiny. Could there be deeper forces at work? A paper from the New York Fed in December attributed much of the dollar’s primacy to a so-called “Imperial Circle.”

The basic idea is that the dollar is not just integral to world commerce, but is increasingly important. When the Fed lifts rates, the dollar gains, mostly at the expense of emerging markets. But when the slowdown comes as a result of that tightening, the effects are felt more keenly beyond US shores than domestically. This is because exports and imports account for a relatively small part of the US economy. The demand for safe and liquid assets — chiefly, US Treasuries — also plays an enormous role.