CIO expects rate differentials between the US dollar and other currencies to narrow, and the dollar’s downtrend to continue in the months ahead. (ddp)

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's decline has resumed after a resilient first half of the year.

  • The DXY index held its ground in the first half of 2023, supported by resilient US data and still-elevated inflation.
  • However, the index is now 12.5% down from a 20-year peak in September, and the fall has accelerated after the release of muted inflation data for June.
  • Annual headline inflation for the month was 3%, down from 4%the prior month and the smallest increase since March 2021.

We expect dollar weakness to persist as the US interest rate advantage continues to narrow.

  • As the Fed’s hiking cycle comes closer to an end, we expect the US interest rate premium to shrink further.
  • In Japan, an improving economic backdrop suggests the Bank of Japan could 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 have a least preferred view on the US dollar and a most preferred view on the euro and the Japanese yen.
  • We also advise investors with the British pound and Swiss franc as their home currency to strengthen their home bias.
  • 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 starting 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.

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 are least preferred on the US dollar, and most preferred on the euro and the yen. We also expect the British pound and Swiss franc to appreciate. Investors can consider various strategies to enhance yield by utilizing volatility in the options market.

Main contributors - Christopher Swann, Dominic Schnider

Original report - Will the dollar fall further?, 17 July 2023.