Dollar will receive support due to risk of recession
2022.12.08 07:35
Dollar will receive support due to risk of recession
Budrigannews.com – Investors were able to make one of the few winning trades of the year thanks to a stunning rise in the value of the United States dollar, which hurt other currencies and hurt corporate profits. Even though the dollar has fallen in recent weeks, fears of a recession may keep it rising in 2023.
After increasing by roughly 20% against a basket of currencies at its peak in September, the value of the dollar was at its highest level in nearly two decades. Investors are betting that the Federal Reserve is getting closer to slowing the rate increases that fueled the dollar’s gains, and as a result, those gains for the year to date have been roughly cut in half.
GRAPHIC: Strong dollar Despite the fact that rising U.S. yields were a major driver of the dollar’s rally, other factors also played a significant role. In order to protect themselves from market volatility brought on by rising energy costs, Russia’s invasion of Ukraine, and rising global inflation, investors flocked to the dollar, a popular investment option during uncertain times.
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The comparative strength of the U.S. economy, at a time when fears of an energy crisis hammered European assets and strict COVID-19 controls harmed China’s growth, also increased the dollar’s allure.
The dollar is still on track for its best year since 2014, despite losing some of its gains. A record number of respondents to BoFA Global Research’s survey stated that the currency was overvalued, and it was named the market’s most crowded trade for the fifth consecutive month in November.
However, a Reuters survey of 66 foreign exchange strategists found that the dollar will remain at its current level for at least a year. Many of the respondents anticipated that global central bank policy tightening would hurt growth and increase the greenback’s appeal as a safe haven once more.
Investors need to get the dollar right because its trajectory influences everything, from corporate earnings to the prices of raw materials like oil and gold.
A stronger dollar hurts U.S. multinationals that need to convert their earnings into dollars and makes the products of U.S. exporters less competitive abroad. Bank of America (NYSE:) estimates that the company’s foreign exposure is approximately 30%. with the industries of technology and materials most at risk.
NYSE: Nike, (NYSE:) IBM and Meta Platforms were among the many businesses that predicted that a stronger dollar would hurt this year. The dollar’s assembly shaved around 8% from S&P profit in 2022, as per Tom Lee, head of examination at Fundstrat Worldwide Consultants.
A stronger U.S. currency puts pressure on the price of oil and other dollar-denominated commodities for the rest of the world by making them more expensive for foreign buyers and for foreign governments and businesses that have borrowed dollars to service their debt.
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Additionally, while a strong dollar can reduce consumer prices in the United States, it also devalues the currencies of other nations, contributing to global inflation. In October, the International Monetary Fund estimated that a 10% dollar appreciation would, on average, result in 1% inflation.
GRAPHIC-Select global currencies and compare them to the dollar. WHAT DOES THIS MEAN FOR 2023?
There are indications that sentiment on Wall Street regarding the dollar may be changing. The fact that consumer prices fell less in October than anticipated contributed to the dollar’s biggest monthly decline since 2010—a 5 percent decline against a basket of currencies—last month.
Reuters calculations based on data from the U.S. Commodity Futures Trading Commission showed that in November, speculative traders switched to a net short position on the U.S. dollar for the first time in 16 months.
The Fed’s ability to contain inflation sufficiently to eventually ease monetary policy may determine whether the dollar’s decline continues. The case for further declines in the dollar may be strengthened by a positive inflation reading in U.S. data due next week.
Investors are also looking forward to the Fed’s monetary policy meeting on December 14, at which the central bank is widely expected to slow the rate hike rate by 50 basis points.
In the long run, concerns about the economy may become the primary driver of dollar movements. Reuters surveyed nearly 80% of strategists and found that monetary policy had little room for the dollar to rise.
Examine the news stories that dominated the year and the outlook for 2023 in the Reuters roundup.
