Image: Photo by Anthony Quintano. Licensing: CC 2.0. Sourced: Flickr.

The U.S. Dollar is on top amidst expectations for yet higher interest rates in the U.S. and other major developed economies that economists fear will lead to the kind of economic slowdown that typically favours the world's de facto currency.

The Pound to Dollar exchange rate edged lower to 1.2735 amidst a strong and broad-based USD comeback, taking the pair's weekly decline to 0.66% and threatening to snap a run of three consecutive weeks of advance for Pound Sterling.

To be sure, Sterling is resisting the Dollar's advances more successfully than the majority of its G10 compatriots, with only the Yen putting in a more valiant effort:

But make no mistake, "the Dollar's back in charge," says Kit Juckes, head of FX research at Société Générale.

Underwriting demand for the world's most liquid financial asset is a warning from U.S. Treasury Secretary Janet Yellen that a slowdown in consumer spending may be the price that has to be paid to get inflation down.

Juckes says markets have reacted to Yellen's comments by pricing in a little more tightening from the Federal Reserve than they did before, and 2-year yields have moved above 4.75%.

"After bigger-than-expected rate hikes in the UK and Norway yesterday, the markets are nervous about upside rate surprises, and that was helping the dollar overnight, even before we saw the European PMI data," says Juckes.

Higher rates spell a deeper economic recession ahead than perhaps many in the market were anticipating, creating the conditions that tend to favour the likes of the Dollar and Yen.

"It's taken another round of hawkish central bank rhetoric, culminating with the Bank of England's larger-than-expected rate hike, for markets to finally heed the message that the era of restrictive policy is nowhere near the end," says Raffi Boyadjian, Lead Investment Analyst at XM.com.

Boyadjian says the Bank of England's decision to accelerate its pace of rate increases on Thursday just as many other central banks are skipping some meetings appears to have raised the alarm beyond UK markets, serving as the strongest reminder yet that the fight against high inflation is far from over.

"Rate rises from the Swiss National Bank as well as Norway's and Turkey’s central banks on Thursday underlined the tightening trend, while Fed Chair Powell not deviating from the script as he addressed lawmakers to flag two additional hikes further rattled markets," she adds.

The ongoing and rapid rise in global interest rates is creating a "shocking decline in the money supply," warns Albert Edwards, Co-head of Global Strategy at Société Générale. (Full article here).

He suggests central banks could be making another mistake by being too aggressive this late in the hiking cycle despite mounting evidence their rate hikes have put in motion a slowdown.

He adds this miscalculation could yet result in "financial collapse".

The cracks in the major economies in America and Europe are becoming more visible," says Boyadjian. "Manufacturing activity in the euro area contracted at the fastest pace since May 2020 according to flash PMI estimates for June and overall activity was almost flat."

"The darkening picture revived the US dollar’s safe-haven appeal this week, pushing its index against a basket of currencies to a more than one-week high," she adds. "The greenback is once again enjoying the combination of haven demand and a hawkish Fed, backed by a relatively stronger economy among the advanced nations."