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US dollar pull back from 20 years high.

 

The dollar has fallen in the past fortnight from a 20-year high as signs of inflation easing in the US fuel speculation that the Federal Reserve will soon slow down its rate rises. The greenback has declined more than 3 per cent against a basket of six peers in November, leaving it on track for the biggest monthly fall since July 2020, according to Refinitiv data, and sparking a debate in currency markets over whether the currency has peaked. This month’s fall comes as investors scrutinise early indications that US inflation may finally be easing, potentially paving the way for the Fed to reduce the speed at which it has been boosting borrowing costs. However, some data, such as those on the housing and manufacturing sectors, have also suggested the broader economy is facing rising headwinds, another deterrent to Fed monetary tightening.

Everything is pointing to disinflation in the US, and with that, we will see a slowdown in the US economy in the first quarter of next year. The yen has rebounded somewhat from a slide to a 32-year low against the dollar, prompting the Japanese government to spend billions propping up its currency. Indications of easing inflation have also upended wildly popular wagers on a stronger dollar in currency markets. «We expect the US dollar’s powerful climb over the past year to reverse in 2023 as the Fed’s hiking cycle ends,» HSBC foreign exchange strategists wrote in a note to clients last week.

In recent weeks, traders have trimmed their bets on a stronger dollar to the lowest level in a year, according to figures from the Commodity Futures Trading Commission, which provide a snapshot of how speculative investors such as hedge funds are positioned in currency markets. At the same time, fears of a global recession and the financial market volatility unleashed by rapid monetary tightening also favoured the US currency, which as the ultimate safe harbour of the global financial system, tends to rise in times of stress. Both those tailwinds are now set to fade, according to HSBC, which argued that «gravity should take hold» for the dollar as the often chaotic sell-off in global bond markets, caused partly by central bank rate rises, calms. Despite the about-turn in markets, a few recent hawkish speeches from Fed officials have tempered bets that the Fed is slowing down.

« Even if inflation has peaked, it will be sticky and volatile on the way down». With traders firmly focused on month-by-month US inflation figures, he added that a slight upside surprise could easily cause the entire global currency market to skew back in the other direction. That sentiment was evident in remarks by St Louis Fed president James Bullard on Thursday, who said that rates would need to be raised to a minimum of 5 per cent to tame inflation. «It’s premature to call a peak in the dollar because the Fed expects further rate hikes,» said Joe Manimbo, an analyst at Convera.

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  1. Chris22 November 2022 at 12:24

    The dollar tends to rise in times of stress which is exactly why it has risen to where it stands. Now, as some tensions are lowered, the dollar will go down a bit. If a US recession will follow (in the next 9 months) then the dollar will go down like never before.

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