The US dollar has risen around 12% over the past year versus a broad basket of the currencies of the US’s major trading partners. That’s a larger-than-usual move, but continues a trend that has been in place for nearly a decade. Over that period, the dollar has risen some 45%.

Portfolio returns can be substantially enhanced or hindered by currency movements of this magnitude. The abrdn Foreign Exchange Steering Group seeks to understand the key drivers of currencies so that trends in foreign exchange may contribute to lower risks, higher returns, or both, for portfolios investing globally.

Recently, we identified changes in the key drivers that have been most supportive of dollar strength. If the relative importance of these drivers alter, as we expect, other currencies, such as the Swiss franc and Japanese yen, may also begin to add value to portfolios.

Exchange rates summarize macroeconomic comparisons

In the last few decades, global capital has become increasingly mobile. Businesses and investors generally seek to move money to get the best returns. That’s why the currencies of countries with strong growth, higher interest rates and competitive advantages in trade and political stability, have tended to appreciate relative to others.

In our analysis of exchange rates, we look for discrepancies in these factors that have not been fully captured by exchange rate movements. Here are three types of data we use to compare countries:

  • Interest rates: High or rising rates generally reflect monetary policy seeking to balance the effects of strong growth on inflation and inflation expectations. These countries tend to attract global capital that supports the growth.
  • Terms of trade: This reflects the relative pricing of a country’s exports and imports. Changes in the terms of trade can lead to larger currency flows or more appealing investment opportunities between countries.
  • Purchasing managers indices (PMI):  A high and rising index reflects growth optimism in a particular country (and often points to an appreciating currency), relative to those with weaker PMI levels.

While there are a myriad of other methods to compare countries, these three have become dominant in this short and volatile cycle. Changes in these variables lead to a significant relative advantage for certain economies over others.

Foreign exchange markets are one of the most efficient and liquid ways for investors to price changes in the comparative advantages of one economy over another, and so these variables warrant close attention in portfolio management.

US leading a global interest-rate-hiking cycle

The Covid pandemic saw most western economies shut down a large proportion of economic activity. Their reopening saw an equally volatile surge in economic activity.

Central banks were slow to remove accommodative policies during the recovery. But when the US Federal Reserve (Fed) realized in the fourth quarter of last year that loose monetary policy was inflaming inflationary pressures, they aggressively sought to bring about an adjustment of rate-hike expectations for 2022 and 2023.

While rates in the US rose sharply, many other central banks were slower in their reaction to inflationary pressures. The volatility in US rates, combined with the widening rate-gap in the US versus other economies, contributed to dollar strength in 2022.

So what? Other central banks are now increasing interest rates. This means we should expect less abrupt changes in interest-rate expectations and less extreme currency movements as a result of this key driver.

Shifting commodity prices alter global trade values

The surge in ‘reopening’ demand, rising inflation expectations and the war between Russia and Ukraine have caused a very large surge in commodity prices, especially energy.

After decades of globalisation, there are some countries that are heavy commodity exporters (e.g. Australia and Brazil) and there are others that are big commodity importers (e.g. European countries). An abrupt change in the value of globally-traded commodities saw much larger money flows from commodity importers to exporters, and sharp adjustments in foreign-exchange rates to reflect this.

Interestingly, the US had historically been vulnerable to commodity prices as it was a major importer of energy. But after a decade or more of growth in domestic shale oil and gas production, the US is now the largest energy producer in the world and more of a beneficiary of rising oil prices.

So, while rising commodity prices might previously have been correlated with dollar weakness, the dollar this year has seen little downward pressure (and probably some upward support) from the spike in commodity prices.

So what? Commodity prices appear to have peaked in the short term. As growth slows, the demand for commodities may decline further. Therefore, the importance of this key driver on currency movements may decline relative to other drivers.

Chart 1: Rising interest rates and oil prices have supported the US Dollar

Source: Bloomberg/abrdn. 9 August 2022. For illustrative purposes only. No assumptions regarding future performance should be made.

Policy-led recession likely, capital safety a priority

More restrictive monetary policy and sky-high commodity prices have finally begun to damage business and consumer sentiment.

A growth slowdown is underway and some indicators, such as PMI, are suggesting this could be a rapid and deep slowdown. During slowdowns, and particularly recessions, currencies of so called ‘safe-havens’ tend to be where investors seek refuge.

Chart 2: US Manufacturing New Orders PMI has been falling sharply recently

Source: Bloomberg/abrdn. 9 August 2022. For illustrative purposes only. No assumptions regarding future performance should be made.

These types of currencies tend to have very stable policy and political environments, reserve currency status and strategic importance in global currency/trade flows.

So what? The dollar is dominant but the Japanese yen and Swiss franc are also regional "safe-havens." These currencies have begun to see more global demand and strength as recession fears escalate.

Three key takeaways:

  • Monetary policy tightening and easing commodity prices mean their importance as currency drivers will wane
  • Instead, macroeconomic factors will become more important to currency dynamics as recession looms
  • Dollar strength will likely continue but other currencies, like the Swiss franc and Japanese yen, may become useful in portfolios


Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.