Where next for the US Dollar?

2022 saw a lot of Fed hawkishness priced into USD. Other central banks (such as the ECB) catching up with Fed rates has seen some of the strength in the USD reverse in 2023. The dollar is an interesting beast, and determining its driver – rate differentials or safe haven status – can be tricky. This is especially true should there be another US-centric credit event that dampens sentiment around the US economy, as with SVB. In that case, markets priced in a higher likelihood of Fed cuts, leading to a weaker dollar, while other currencies like the JPY benefitted from a renewed safe haven status. On the other hand, a credit event elsewhere in the world could benefit the USD.

In the absence of any major risk-off sentiment,  we’d expect the USD to continue its trajectory lower given narrowing rate differentials and the appeal of higher carry currencies or other highly traded ‘reserve’ currencies that in my mind have room to outperform (JPY and CNY, for example).