Nonfarm payrolls to set the tone for US dollar in new year
XM Group | Jan 04, 2023 10:12AM ET
Dollar wins 2022 - what about 2023?
The US dollar rally lost some steam in the final stages of 2022, but nevertheless, the reserve currency still came out as the big winner of the year. It was a story of interest rate differentials as the Fed raised rates faster than other central banks, safe-haven flows, and an absence of any attractive alternatives.
Looking into 2023, the question is whether the dollar will remain the ‘alpha’ in the FX complex or whether a bearish reversal is on the cards. There’s a case to be made that it might be a year of two halves, with dollar strength persisting early in the year, only to reverse later on.
The logic is that America is in better shape than most other economies, partly because its vast energy production helped shield it from the global power crisis, and partly because higher interest rates take longer to impact US economic activity. Most US mortgages are on fixed rates, so it takes some time before higher rates can slow the economy, as most homeowners are not directly affected.
On a simpler level, America is stronger than most economies. Business surveys suggest recession risks are greater in the Eurozone and United Kingdom, China is dealing with the painful deleveraging of its property sector, while nations like Canada and Australia have housing markets that are vulnerable in a higher rate environment.
Historically speaking, the dollar tends to depreciate when the global economy is booming and capital leaves the United States, searching for higher returns abroad. That’s not the case today, hence why it is still too early to envision a sustained downtrend in the reserve currency.
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