Currencies Is the US dollar rally over?

CIO expects rate differentials between the US dollar and other currencies to narrow and sees the dollar’s decline continuing in the months ahead.

The US dollar has remained relatively resilient in the first half of 2023.

• Fed tightened policy and US economic data proved more resilient than expected.
• The DXY dollar index has retreated only around 2% so far this year, from 104.5 to 102.4.
• That represents a stabilization, following a roughly 9% decline from a 20-year high in September to the start of 2023.

But we expect the US currency to weaken again in the months ahead.

• As the Fed’s hiking cycle gets closer to an end, we expect the US interest rate premium to shrink further, especially given the US central bank's pause in rate hikes.
• The improving economic backdrop suggests the Bank of Japan is likely to tighten its very loose monetary policy in the second half of 2023.
• We expect the Swiss National Bank to remain hawkish to keep price pressures contained and the franc stable in real terms, meaning we still see value in the CHF as a safe-haven currency versus the USD.

So we advise investors with the yen, euro, pound, and Swiss franc as their base currency to strengthen their home bias.

• We therefore recommend investors with the Japanese yen, euro, British pound, or Swiss franc as their home currency to strengthen their home bias. We also expect gold to reach new all-time highs.
• A weaker US dollar should benefit gold, and we expect the yellow metal to reach a new all-time high of USD 2,250/oz by June 2024.

Did you know?

• The Federal Reserve left interest rates unchanged at its policy meeting in June, breaking an uninterrupted series of 10 rate hikes stretching back to March 2022. But officials signaled further increases were likely given the strength of the labor market and still-high inflation.
• Gold has traditionally played an insurance role in a portfolio context. We expect prices to rise over the next 12 months, with ETF inflows and elevated central bank holdings.
• Japan was a laggard in reopening its economy after COVID-related lockdowns. Consequently, inflation, employment, and house prices there rebounded later than in other G10 countries. But recent data have been encouraging and supports our view that the Bank of Japan will tighten policy in the remainder of 2023.

Investment view

We recommend investors with the Japanese yen, euro, British pound, or Swiss franc as their home currency to strengthen their home bias. We also expect gold to reach new all-time highs. Investors can consider various strategies to enhance yield by utilizing volatility in the options market. Volatility-selling strategies based on the pound, the Australian dollar, and the yen all look attractive to us in the current environment.

Content is a product of the Chief Investment Office (CIO).

Original report - Is the US dollar rally over?, 23 June 2023.