"The US dollar still has room for growth, but one day it will give up 's increase ".
In the first 10 months of 2022, the dollar index , which tracks the trend of the US dollar against a basket of currencies, rose 16% in total, setting the largest increase since 1985. Behind this is Fed raised the interest rate by nearly 4 percentage points to cope with the highest inflation since the early 1980s, and thus pushing up the US Treasury yield.
Some other countries have also taken the rate hike action, but the US rate hike is faster, giving investors a reason to buy the US dollar as yields rise. In addition, the soaring energy prices caused by the Russian-Ukrainian conflict has further increased the attractiveness of the US dollar as a safe-haven currency.
But all this changed in November. As of November 30, the U.S. dollar index fell 4.94% in November because U.S. inflation is slowing down, triggering expectations that the Fed may slow down interest rate hikes. This is the biggest single-month decline the dollar index has hit since it fell 5.39% in September 2010.
If this means the dollar has peaked and started to fall, that is good news for US multinationals, as the stronger dollar lowers the overseas sales revenue of these companies. Economists and foreign exchange strategists at institutions such as UBS (UBS) and Bank of America (BofA) believe that the US dollar still has room for growth, but no matter how much it rises, it may be difficult to keep these gains. "We think the dollar may recover lost ground in the short term," said Brian Rose, senior economist at UBS.
Rose mentioned the factor of oil prices. In March, WTI crude oil price hit a peak of $123.70, but has recently fallen below $80. Ross said oil prices could rebound, reminding investors that European negotiations on limiting Russian oil prices have not yet made progress, and there is uncertainty about how Russia will respond to the "price limit order".
Ross said that the rebound in oil prices will "harm the market", prompting investors to stay away from high-risk investments and buy the US dollar again.
Bank of American strategists led by David Hauner recently wrote in a research report that Bank of America believes that the US dollar still has room for growth before it peaks in the first quarter of 2023. This is because The global economy is still at risk of stagflation, forcing Global central banks to respond by hiking interest rates.
If the Fed rate hike exceeds other central bank , the US dollar will be boosted. The market generally believes that the Fed will slow down interest rate hikes at its policy meeting on December 13-14, with interest rate hikes of 50 basis points, less than 75 basis points in the past four meetings, but some other central banks have also slowed down their pace of tightening policies.
In any case, the factors such as rising market volatility and risks in geopolitical will not disappear soon, Edward Moya, senior market analyst at brokerage OANDA, said: "Multiple risks may prompt investors to stay on the defensive, which will support the US dollar."
Although uncertainty in the short term may drive the US dollar up, a more common view is that the US dollar will weaken sometime in 2023.
Hona believes that the US dollar will peak after the first quarter of next year. One of the reasons is that he believes that China's economy will rebound after relaxing epidemic prevention and control measures, which will help improve corporate supply chain issues and market confidence in the global economy, and thus reduce the demand for the US dollar as a safe-haven currency. Roger Hallam, head of global interest rate strategy at Pioneer Group (Vanguard), agrees with this. In addition to the recovery of China's economy, he also believes that the gap between the Fed and other central banks in the interest rate hikes may narrow, weakening the rise of the US dollar in 2023. He told Barron's magazine: "The period of the most severe monetary policy of various countries may have passed."
Ross believes that the US dollar "will one day give up the gains, which is inevitable." He believes that the US dollar is overvalued and "it is difficult to maintain at the current level."
However, investors should be prepared for fluctuations in the US dollar exchange rate in the short term.
article | Barrons magazine contributor Karishma Vanjani
edited | Guo Liqun
Copyright statement:
Original article from Barronschina, no reproduction without permission. See the English version of "The Dollar Had Its Worst Month in 12 Years. What Happens Next."
(The content of this article is for reference only, and investment advice does not represent the tendency of "Barron's"; the market is risky, so investment must be cautious.)
