Currencies Is the US dollar rally over?

But the Dollar Index is still down roughly 10% from a 20-year high reached in September. We expect rate differentials between the US dollar and other currencies to narrow and see the dollar’s decline continuing in the months ahead.

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

• The Fed tightened policy and US economic data proved more robust than expected.
• The DXY dollar index has retreated only around 1% so far this year, from 103.5 to 102.4, as of 10 July.
• That represents a stabilization, following a 10% decline from a 20-year high in September to the start of 2023.

But we expect the US currency to depreciate further over our tactical investment horizon.

• As the Fed’s hiking cycle gets closer to an end, we expect the US interest rate premium to shrink further, especially given the Fed's pause in June.
• 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 see value in the CHF as a safe-haven currency versus the USD.

So we advise investors to continue to position for a weaker US dollar.

• We recommend investors with the Japanese yen, euro, British pound, or Swiss franc as their home currency to strengthen their home bias.
• A weaker US dollar should benefit gold.
• 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, a position underlined by the minutes of the meeting that were released on 5 June.
• 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.

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.

Main contributors - Daisy Tseng, Dominic Schnider

Original report - Is the US dollar rally over?, 10 July 2023.