Since 2022, under the influence of factors such as Fed aggressive interest rate hikes and rising market risk aversion, the US dollar has strengthened sharply. The US dollar index once hit a new high in the past 20 years. Major non-US currencies have been under significant pressure. "Changing Winds".
Since November, as the US inflation data has gradually come down, the market expects the pace of Fed rate hikes to slow down and has risen, and the US dollar has started to turn down. The Federal Reserve announced a 50-basis-point rate hike in its December interest rate meeting, confirming previous market expectations, which further put downward pressure on the dollar, and the dollar index once fell to 103.36, the lowest since June this year. In November alone, the U.S. dollar index fell by 5%, the largest monthly decline since September 2010. Since the beginning of November, the U.S. dollar index has fallen by nearly 9%.
HYCM Societe Generale Investment Analysis Team pointed out, "With the decline in inflation data and the pace of Fed rate hikes slowing down, it is foreseeable that the path of the Fed's benchmark interest rate has become clear, and similar previous violent rate hikes will not occur. The upside of the U.S. dollar is reduced, and the outlook for the U.S. dollar in 2023 may completely change, which is expected to bring a good opportunity for non-U.S. currencies such as euro , Japanese yen, British pound and renminbi to counterattack."
However, the analysis team added: "In the short term, although U.S. inflation has peaked and declined, the Fed still seems to believe that inflation is too high and too far away from the 2% target. In particular, a strong labor market may make inflation more sticky, so most Fed officials believe that it should continue to increase. Interest rate to fight inflation. According to the latest dot plot of the Federal Reserve, the peak interest rate of the Federal Reserve will rise to about 5.1%. This point was also mentioned by Fed Chairman Powell in the statement after the interest rate meeting this month. Therefore, in this In a situation where the hawks play the leading role, the dollar may not see a big reversal soon,"
3 factors to watch the future trend of the dollar
Factor 1: When is the end point of the Fed's peak interest rate
Due to Fed Chairman Powell's decision after the December interest rate meeting The press conference stated that the pace of subsequent interest rate hikes will slow down, but the final interest rate will be higher than originally expected. The terminal rate should be higher than the 4.6% level estimated in September, which also represents a variable for the dollar.
From this month's interest rate meeting, 17 of the 19 Fed officials expect interest rates to be higher than 5% in 2023, and the median end-point rate forecast is 5.1%, which is 50% higher than the 4.6% estimated in September 1 basis point, reflecting that the Fed will remain hawkish, and under this expectation, the dollar is expected to gain support in the short-term , and we need to pay attention to whether the Fed’s hawkish rate hike will exacerbate the possibility of economic recession, but from the current data Look, it seems that economic growth is gaining momentum, so the dollar will also face upward pressure. It is expected that the US dollar index will fluctuate in the range of 102-107 in the short term before the first quarter of next year.
Factor 2: The US job market is slowing or strong
Overall, the US job market remains strong. The latest non-agricultural employment report released at the beginning of this month showed that the number of non-agricultural employment in the United States increased by 263,000 in November, far higher than the 200,000 expected by the market, and the unemployment rate remained at 3.7%, which is still at a relatively low point in the past 50 years. The overall job market remains strong.
Strong economic data will provide the Fed with more reasons to raise interest rates, and the dollar is also expected to benefit from this. In addition, for the market, strong employment data will also create an expectation for investors: Will continuous interest rate hikes lead to economic recession? Such expectations usually lead investors to sell stocks, , commodities and other risky assets, and buy dollars to seek hedging.
Factor 3: The speed of inflation decline
The latest inflation data released on the 13th of this month showed that the US consumer price index (CPI) The monthly rate increased by 0.1%, far below market expectations of 0.3%, and the annual rate rose by 7.1%, which was the lowest since December last year, and fell significantly from the high of 9.1% in June this year. As inflationary pressures gradually subside, this also makes investors hope that the Federal Reserve monetary policy is ready to turn.
In addition, the US core personal consumption expenditures (PCE) price index announced last Friday (December 23) dropped to 4.7% from 5% in October, and the monthly growth rate also slowed from 0.3% to 0.2%. , indicating that inflation continued to cool down. In addition, U.S. consumers' inflation expectations for the year ahead fell to their lowest in 18 months in December.
This means that if the level of inflation in the United States continues to decline, the Fed will stop raising interest rates after the interest rate reaches the terminal peak level in 2023, which will face a huge test for the dollar. If the economy shows signs of recession, it is not ruled out that the Federal Reserve will restart the rate cut action, and the reversal of the dollar is expected to begin at that time.
How to trade the US dollar in 2023
Some analysts said that under the premise that the Fed has not stopped raising interest rates, the inflation rate has not returned below 4.5%, and the US dollar is still viewed as bullish in the long run; Supportive growth outside the United States could easily weigh on the already overvalued dollar. Therefore, it is not recommended to create a long position in the US dollar, and investors should deploy to reduce the excessive US dollar positions .
HYCM Societe Generale Investment Analysis Team said, “The U.S. dollar index has fallen sharply since November, reflecting that the Federal Reserve and those major global central banks that follow the Fed’s pace have begun to ease the heavy pressure of the economic recession by slowing down the pace of interest rate hikes. For the U.S. dollar We believe that the trend in 2023 mainly depends on two aspects: first, the timing of the Fed’s suspension of interest rate hikes. From the current point of view, the timing may fall at the end of the second quarter of 2023; Can a successful soft landing be achieved against the backdrop of interest rate hikes by major central banks. Therefore, we believe that before these two factors become clear, the dollar may fall into a wide range of volatility.”
In any case, entering 2023, we can foresee that there will be a higher Under the low US dollar interest rate, the global economic demand will further shrink, and major developed economies such as Europe and the United States will have a higher risk of economic recession, and the central banks of Europe and the United States may end the interest rate hike cycle earlier than expected. When the global economy initially stabilizes, the market's trading focus may shift from recession to recovery, and the US dollar may start a trending downward cycle in 2023.
This article comes from the financial world
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