A breathtaking rally in the U.S. dollar crushed foreign currencies, boosted corporate profits and gave investors one of the few winning trades of the year. Although the greenback has stumbled in recent weeks, recession fears could keep it higher in 2023.
At its peak in September, the dollar stood at its highest level in nearly two decades after rising nearly 20 percent against a basket of currencies. Those year-to-date gains have been roughly halved as investors bet the Federal Reserve is close to slowing the pace of rate hikes that helped fuel the dollar’s gains.
While the rise in US yields was a key catalyst for the dollar’s rally, other factors played a role in boosting the rupee. It’s a popular spot as investors flock to the dollar to avoid market volatility stemming from global inflation, rising energy prices and Russia’s invasion of Ukraine.
Also adding to the dollar’s appeal was the relative strength of the US economy at a time when fears of an energy crisis hurt European assets while tighter COVID-19 controls hurt China’s growth.
Even after paring some of its gains, the dollar is still on track for its best year since 2014. Fund managers in a survey by BoFA Global Research called it the most crowded market in November for the fifth month in a row, and a record number of survey participants said the currency was overvalued.
Still, a Reuters poll of 66 foreign exchange strategists suggested the dollar would trade at its current level about a year from now, with many expecting tightening global central bank policy to hurt growth. will arrive and the greenback’s safe-haven appeal will once again be boosted.
Why is this important?
The value of the dollar is key for investors, as its speed affects everything from corporate earnings to the prices of commodities such as oil and gold.
A strong dollar makes U.S. exporters’ products less competitive abroad while hurting U.S. multinational companies that need to convert their earnings into dollars. According to Bank of America, the foreign exposure of the S&P 500 is about 30%, with the technology and materials sectors most at risk.
Nike, IBM and MetaPlatforms were among a wide range of companies that have warned against a stronger dollar this year. According to Tom Lee, head of research at FundStreet Global Advisors, the dollar’s rally will shave about 8% off S&P earnings in 2022.
For the rest of the world, a stronger U.S. currency puts pressure on the price of oil and other dollar-denominated commodities by making them more expensive for foreign buyers, while also making them more expensive for foreign companies and governments that use their services. Has taken a loan in dollars. Debt
And while a stronger greenback can lower prices for U.S. consumers, it also pushes down other countries’ currencies, helping to drive up inflation around the world. The International Monetary Fund estimated in October that, on average, a 10% dollar appreciation in inflation is estimated to be 1%.
What does this mean for 2023?
There are signs that Wall Street sentiment on the dollar is changing. A smaller-than-expected fall in consumer prices in October fueled the dollar’s 5% decline against a basket of currencies last month, the biggest monthly decline since 2010, the data showed. .
In futures markets, speculative traders fell into a net short position on the U.S. dollar in November for the first time in 16 months, according to a Reuters tally based on data from the U.S. Commodity Futures Trading Commission.
Whether the dollar continues to fall may depend on whether the Fed is able to tame inflation enough to eventually ease monetary policy. Another inflation reading in next week’s US data could bolster the case for further dollar weakness.
Investors are also looking forward to December. 14 conclusion of the Fed’s monetary policy meeting, in which the central bank is expected to slow the pace of rate hikes by providing a 50 basis point hike.