- Dollar at its best year since 1997
- Economic studies suggest that the euro could trade below the dollar at 0.85 cents per dollar
- This strength is supported by the Fed’s aggressive rate hike policy.
The dollar’s global rise raises questions about how much longer it can be sustained. The U.S. currency rose 13% during 2022 and is at a two-decade high against other currencies. This upward path is on track to be its best year since 1997. The momentum is supported by the Federal Reserve’s aggressive policy and investor sentiment seeking a safe haven from the vicissitudes of the global economic crisis.
The rise of the dollar had an immediate effect on the markets, which led the euro to hit its lowest level in more than two decades. However, studies have shown that we are facing an overvaluation of the euro. This could stop when interest rates start to fall next year.
The strengthening of the dollar generates conflicting positions among investors who are hesitant to stand in its way, even though the prices of other currencies look attractive in this context.
While the US interest rate hike cycle seems far from over, the outlook for the world’s other economies is dark. This increases interest in the dollar as a store of value. This is happening in many emerging economies as well as in Europe where many doubt that the ECB (European Central Bank) will raise rates too much without hindering growth.
The Deustche Bank’s economic outlook for the week shows that the euro could fall to $0.85 after breaking $1.00 this week for the first time in 20 years. Higher rates from the Fed are making the U.S. currency more attractive to investors. The worrisome gap could eventually narrow if other central banks begin to tighten monetary policy in the same way. A clear example is the Bank of Canada, which this week raised its rate by 100 basis points.
Futures markets are discounting that the rate hike will persist throughout 2022 and the tapering will occur in the first months of 2023.
Bullish sentiment in dollar futures stands at $18.20 billion in the last week, compared to a peak of $35 billion in 2019, data from the Commodity Futures Trading Commission showed.
For now, the dollar continues to dominate the scene ahead of all currencies. Forecasts from previous years that spoke of a decline of this currency in favor of other assets have so far been totally wrong.
