U. S. dollar accelerates the fall
2023.01.18 13:34
U. S. dollar accelerates the fall
By Kristina Sobol
Budrigannews.com – There is still a long way to go in the U.S. dollar’s accelerating decline from its awe-inspiring highs in 2022, but the speed of the decline may point to a soft landing later this year.
When markets saw the peak of Federal Reserve interest rates on the horizon, a reversal of the nearly 30% jump in the dollar’s main index from the post-pandemic lows of early 2021 to September’s 20-year peak seemed like a sure thing.
With evidence of persistent deflation, a frantic Fed tightening campaign that boosted the buck appears to be coming to an end. By the middle of the year, futures anticipate a few more modest rate hikes and a “terminal rate” of just under 5%, followed by roughly half-point cuts in the second half.
That would appears to have taken more than 10% of the money over the past three months when taken individually.
However, it has been much more than just a Fed story. Against the dollar, the stars are aligning all over the world.
The then-exploding yen was stabilized by Japan’s dramatic currency intervention in October, which culminated last month with the Bank of Japan’s first gradual departure from its ultra-loose monetary policy. The yen has recovered almost 20% in just over two months, indicating that December’s policy change was not a one-time event.
The euro also saw a sharp rebound when the European Central Bank became more hawkish late last year in response to double-digit inflation readings in the euro area.
As a peculiarly warm winter and high storage halved the sky-high European gas prices that many had predicted would spark a recession, it has accelerated to clock three-month gains of approximately 14 percent, leading some to rethink the downturn as outages and rationing appear to have been avoided.
In addition, China abruptly ended its draconian and economically damaging “zero COVID” policy last month in response to unprecedented popular protests. The yuan has already risen by approximately 10% from its lows last year in anticipation of a sharp uptick in Chinese demand this year.
The confluence of recent events is forcing many global banks to reevaluate their dollar views for the year, despite the fact that consensus forecasts at the beginning of the year appeared cautious regarding the extent of further moves.
Morgan Stanley (NYSE:) recently The team stated that they would “double down” on their dollar bearishness and further reduce forecasts, predicting that the euro/dollar would reach 1.15, up from 1.08 earlier.
According to them, “Macro forces once constraining dollar weakness are now amplifying it.” The dollar is rapidly losing its carry advantage, macroeconomic and inflation uncertainty are diminishing, and global growth is showing signs of buoyancy.”
In addition, HSBC anticipates an additional 6% rise in the euro this year and decreased its year-end dollar/yen forecast from 130 to 120 last week. There is still time for the dollar’s downward correction.”
It is unclear to what extent investors are already prepared for this ongoing slide.
According to weekly CFTC data, speculative funds have held a net long position for the previous ten months but have been short dollars overall since November.
However, in a slightly odd twist, global fund managers surveyed by Bank of America (NYSE:) For the seventh month in a row, “long U.S. dollar” remained the “most crowded trade” in global markets this week, albeit less so than in previous months.
In their monthly investor survey, a net 65 percent of respondents still considered the dollar to be overvalued.
The situation is even worse if you prefer to use charts and technical trends as a guide. On the DXY chart last week, a phenomenon known as a “death cross” occurred. This occurs when the short-term 50-day moving average falls below the 200-day equivalent and typically indicates that further severe losses are on the horizon.
However, sharp currency movements frequently sow some of their own recovery seeds.
One glimpse of how was provided last week.
After eight months of decline, annual U.S. import price inflation unexpectedly accelerated once more last month, suggesting that the Fed’s fight against inflation is far from over if greenback losses continue to mount.
The Fed’s policy reversal has always the power to halt current dollar movements; however, the other side of dollar strength could be even more potent because European and Japanese economies must deal with the volatility of dollar-priced energy and commodities.
The surge in the value of the dollar the previous year made the shock to imported energy prices and the spike in inflation for Europe and Japan even more exaggerated. Additionally, it posed a risk of a vicious cycle because the enormous spiral of energy costs ballooned trade deficits in both regions.
Even at the margins, a sharp dollar reversal this year would likely have the opposite effect and reduce the need for the aggressive monetary tightening that is currently priced in for the ECB and BOJ.
That is a reminder that extreme currency movements can frequently self-regulate, despite the fact that circular arguments rarely work out as neatly in reality.
