The US dollar seems the world's strongest currency in 2022. Its index, which includes the euro, the pound and the Japanese yen, among others, has risen by more than 17 percent since January. This seems to be the largest scale of USD strengthening in such a short period of time since 2014.
In 2014, Americans also announced interest rate hikes, and in turn the Eurozone struggled with the crisis in Southern Europe. At present, the U.S. is also in the midst of an interest rate hike cycle from early 2022, and the Eurozone is beginning to grapple with the energy crisis. The increase in risk factors for the eurozone at the same time as faster interest rate hikes overseas could lead to a sharp drop in the EUR/USD exchange rate. A year ago, someone had to pay more than $1.15 for the euro. Today it is just over $0.97. In Poland, on the other hand, a year ago the dollar cost PLN 3.97, and today it is lapping around PLN 5. The pound, on the other hand, was quoted in the region of $1.35 in September 2021, and fell to $1.08 a year later. The Japanese yen can also be added to this puzzle. A year ago, the dollar cost JPY 110, and today there is talk of a level of JPY 145 per dollar.
Source: Conotoxia MT5, USDJPY, MN
Fed and risk deal cards
The U.S. Federal Reserve in early 2022 began a series of interest rate hikes unprecedented since the 1970s. This means that the dollar, as the first currency among the world's major currencies, began to gain more interest after interest rates around the world approached zero as a consequence of the pandemic. The rise in USD interest rates, but especially the pace of increases, may have encouraged investors to return to the dollar. Adding to the expectation of higher interest rates was the risk factor of the outbreak of war. This may have accelerated USD appreciation, which was not previously expected. The dollar's exchange rate shot up. The key now may be further interest rate hikes by the Fed and where they may peak.
Can the dollar exchange rate fall?
So far, the Fed has raised expectations for the final level of interest rates from meeting to meeting. First it was expected to be 3 percent, then just under 4 percent, and now it is estimated to be 4.5-4.75 percent. Since these expectations are no longer raised, the USD may continue its appreciation. According to market expectations, such a situation could occur in the first quarter of 2023 (unless expectations are raised again). It seems, then, that in such a case December could be the month of USD overshoot, as the market could discount in advance of the end of the US hike cycle.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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