• Dollar with turbulent months
• Banking crisis and dispute over debt ceiling as price drivers
• Wells Fargo analyst sees no dollar weakness in 2023
Advertising
Trade AUD/USD and other currencies with leverage via CFD (long and short)
Trade currency pairs like AUD/USD with leverage at Plus500 and participate in rising and falling prices.
Market developments have recently helped the greenback stage a comeback. The US dollar was driven by concerns about “financial instability”, according to an analysis by the Wells Fargo Investment Institute. But while those worries have recently faded, the dollar’s strength is likely to continue, according to Peter Wilson, the financial firm’s global fixed income strategist.
Hedges against interest rate cut risks are fading
At the start of the year, market participants had to protect themselves against the “not inconsiderable risk that something might go wrong – that is, a financial shock that is so great that it forces the Fed to cut interest rates several times,” writes Wilson in an article. This explains the mystery of why the fed funds futures market was pricing in dramatic rate cuts earlier this year despite the Fed’s repeated announcements of “the opposite.”
Most recently, however, market developments had ensured a recovery for the US dollar: the greenback had already risen significantly in 2022, when the Fed began to raise key interest rates significantly, later in connection with the regional banking crisis in March and then again with concerns about a possible default by the US amid dispute over raising debt ceiling in May.
In his analysis, Wilson explained that many market participants and currency investors apparently no longer assumed that the Fed would soon cut interest rates, which in turn would weaken the greenback.
The fact that investors are becoming increasingly less hedging against the risk of rate cuts is an indication that “the market is probably (like us) assuming[geht]that the Fed will keep interest rates at their highest level until 2024”.
Dollar strength by 2024
With these acute risks no longer playing a role in the market for the time being, the dollar has risen back “to the upper half of its trading range for 2023”. The futures market is now pricing in less than a 25 basis point cut.
Wilson and his team assume that the Fed will raise interest rates at least once more this year, until 2024, he believes, will remain at their peak level. As a result, the US dollar will also defend its higher trading range, and a “more significant devaluation” of the greenback is not expected until next year.
The Wells Fargo strategy team also assumes that the US economy will not have a soft landing. According to the experts in their analysis, there will be a recession before inflation is under control.
Editorial office finanzen.net
Image sources: kirill_makarov / Shutterstock.com, olegator / Shutterstock.com