The US dollar may be nearing the end of its run
Meanwhile, the forecasts for the markets seem encouraging. There Truth&Business talked to Jens SøndergaardCurrency Analyst of Capital Group. What forecasts do you have for the European, Chinese and Japanese markets?
Growth prospects for China, Europe, Japan and emerging markets are improving. Just a few months ago, the Chinese economy was held back by the government’s zero-Covid policy, Europe was facing a potential winter energy crisis, the Japanese economy recorded an unexpected contraction in the third quarter and the risk of a global recession loomed over the emerging markets. The early reopening of the Chinese economy improves the 2023 growth prospects for the country and the rest of the world economy. The Chinese government is providing billions of dollars to prop up the slumping housing market and appears closer to enacting reforms for private sector tech companies. European economic data points to lower risks of a deep recession, as data from the Purchasing Managers’ Index (PMI) from the services and manufacturing sectors point to improving conditions. The Japanese economy is also proving resilient. Consumer demand is holding up, despite rising inflation.
Is the US dollar at a turning point?
In the face of the collapse of the end of 2022, many are wondering if, after ten years, the upward run of the greenback is coming to an end. The affirmation of a bearish trend would be good news for investors in international bonds and equities, whose total returns have been eroded by currency effects. In many respects, a fix is long overdue. These are some elements that we are monitoring and that could influence the trend of the dollar.
What impact do rising interest rates have?
In the pre-Covid era, interest rates were low in all major economies, but higher in the US than in Europe, Japan and other developed markets. This was the main factor that pushed the dollar higher against most currencies. Investors globally could obtain higher interest rates and, at the same time, benefit from safe-haven status. Thanks to high forward interest rates, investors could also buy bonds denominated in euros and yen, hedge them in US dollars and receive a higher interest rate. Today the scenario is changing, especially with regard to the euro. Overall, we expect the interest rate differential between the United States and Europe to narrow, which could partially remove support from the dollar. Among the reasons for a potential reduction is the fact that the ECB started the hike cycle later than the Fed. At the same time, the BoE’s interventions contributed to a 15% appreciation of the pound against the US dollar. after the historic low reached in September 2022 due to the problems of the British government. What happens to the currency in the future will probably depend more on potential further rate hikes than on other variables.
What are the risks globally?
If the global economy were to weaken more than expected due to the impact of monetary tightening on the system, the US dollar could be supported by its safe-haven nature and this could possibly delay the repricing of the dollar to fair value. Long-term dollar devaluation also requires substantial improvements in the economic fundamentals – including productivity gains and economic reforms that support free enterprise and capital investment – of Europe, Japan, China and other emerging markets. Over the past decade, the US economy has gained a head start thanks to innovations in technology and healthcare and a system of economic incentives that support entrepreneurship. Although it is still early days, we see moderate signs of change.
And the Eurozone?
In Europe, Italy has prepared a post-pandemic recovery and resilience plan which, if properly implemented, would be significant, given that the country has been an obstacle to European growth for many years. Germany is abandoning long-standing fiscal conservatism and intends to support consumers and industries, even if it means having a higher debt like other EU member countries. And if from a
on the one hand, the increase in European fiscal spending should stimulate growth, on the other, it is not clear what the impact will be on inflation and the ECB’s action. Other conditions in Europe also appear more favourable. Fears of a peripheral debt crisis or a dissolution of the Eurozone eased. Eurozone responses to Brexit, the pandemic and the Russian invasion of Ukraine appear to have helped reassure investors that the region is a safer place to invest today than it was a decade ago.