- This quarter, the dollar fell about 1% because people thought the Federal Reserve might be close to stopping raising interest rates.
- Analysts say that the dollar’s losses could get worse as 2023 goes on.
Last year, the dollar had its biggest annual gain since 2015, but it went down this quarter. Analysts say that this could be a sign of things to come.
The US Dollar Index, which compares the dollar to six other currencies like the euro and the Japanese yen, has gone down by 1.1% over the past three months. This is after it went up by more than 8% last year. From its record high in September, the gauge has dropped more than 10%.
Even though the dollar’s drop this quarter may not seem like much, some experts think it will keep falling for the rest of 2023. There are two main reasons for this.
First, the markets think that the Federal Reserve will soon stop raising interest rates to calm investors’ worries about the health of the US’s regional banks, which have been under fire. CME Group’s Fedwatch tool shows that almost half of traders think the central bank won’t raise interest rates at its next meeting in early May.
Expectations like these are already putting pressure on the dollar, and they could hurt it even more when interest rates stop going up. When that happens, foreign investors who want higher returns will have less reason to buy the dollar.
OANDA analyst Craig Erlam highlighted that central banks in other major economies have not scaled back their interest rate expectations to the same extent as in the US. This disparity suggests growing concerns about the potential negative impact of further tightening measures and the cumulative damage already incurred.
Analysts also predict that the depreciation of the US dollar may intensify as 2023 progresses. The recent shift in expectations regarding interest rates has led to a significant decrease in yields, resulting in negative impacts on the dollar. If yields fail to rebound, there is a possibility that the dollar may face further detrimental effects.
Second, the trend of the dollar is also seen as a sign of the health of the US economy, and analysts are starting to warn that a recession could happen in late 2023.
According to recent statements from strategists at HSBC, it is predicted that the US dollar will further weaken in the latter half of the year. This projected decline is attributed to the anticipated impact of the Federal Reserve’s tightening policies and a decrease in spending levels on the overall economy.
In a research note released on Wednesday, it was stated that the US dollar is expected to start trending downward again due to slowing US growth and peak interest rates. The note further mentioned that the majority of these declines are anticipated to occur from the beginning of the third quarter until the end of the year.
So, even though the dollar’s value has gone down only slightly over the past three months, which was a time of widespread financial trouble, this could change in the future if the Fed starts to loosen monetary policy and the economy goes into a slump.