Has the U.S. Dollar Officially Peaked?
Shane Neagle | Nov 29, 2022 19:46
The U.S. dollar is trading near multi-month lows against its major counterparts on expectations the Federal Reserve may slow down its hiking campaign. The pullback in the dollar index could extend on reports China may finally amend its zero-COVID policy, which would slow demand for safe-haven assets and increase the appeal of risk assets.
The dollar began declining after the latest consumer price index print showed that inflationary pressures are easing in the U.S., raising hopes among investors that the Fed may ease the pace of interest rate hikes after delivering four consecutive 75-basis-point increases.
The Chinese government announced it would 88% of all forex trades .Yet, such a bear run could have broader effects beyond just the currency markets, including easing the pressure on European economies caused by imported inflation and slashing the food prices for developing economies, among other things.
The Bloomberg Dollar Spot Index, which tracks the greenback’s performance against 10 of its biggest peers, is down over 6% from its September high. Meanwhile, the world’s reserve currency has also dropped against all of the 10 rival currencies in the past month, declining as much as 7% against the Japanese yen and New Zealand dollar.
Abrdn’s James Athey thinks the Fed is aware of the delayed effects interest rate hike would have on price growth. Meanwhile, the divergence between the U.S. and Japan’s monetary policy has “reached its limit,” he added.
If both China and Europe weather the upcoming period better than anticipated, it could provide a boost for their respective currencies against the U.S. dollar. Citing these factors, Nomura strategist Jordan Rochester believes the greenback may have peaked against a basket of currencies.
Conclusion/h2
Whether it has peaked or not, a weaker U.S. dollar could reduce the rampant costs of food and energy, as well as alleviate worries for governments with high U.S. dollar debts. While the near-term focus lies on China and likely loosening of strict zero-COVID policy, the expectations surrounding the Fed and bond yields will continue to determine the direction for the greenback.
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