HFM’s Outlook 2023: USA and the USD Index

The USA and the US Dollar – 2023 Outlook

2022 was a year that was extremely unpredictable, volatile, and unstable for the global economy, as global currencies came under extreme pressure with wild swings, reaching unprecedented levels. The year was a tough one for global bonds and stocks, so good riddance.

In 2023, attention will be on the same old factors that drove the markets through 2022, especially including monetary policy decisions and concomitant inflation and recession dynamics. Major central banks are widely expected to continue hiking rate to begin the new year. And the heavy data calendars will feed into policymakers’ decisions on the rate trajectories.

The main beneficiary from all the turmoil has undoubtedly been the US Dollar, as it showed just how resilient it can be as a safe-haven in times of global economic uncertainty, with the US Dollar index reaching a 20-year high in value against a basket of major currencies. Though the course of global economic conditions is expected to change in 2023, pundits still expect the Greenback to continue its bullish momentum and hold its strong position against its counterparts.

The past year has been a significant indicator and affirmation that the US Dollar plays an important role in the global economy, and its strength has remained resilient despite the turbulent economic and geopolitical landscape that encompassed 2022. The Dollar’s sheer reliability has been the cornerstone of its safe-haven status, and this was put to the test with global events ranging from global supply-chain disruptions brought on by post-covid demand, the war in Ukraine, record-high global inflation and increasing global interest rates.

The assistant instructional professor at the University of Chicago’s Harris School of Public Policy, Dave Schabes, reiterated this sentiment and holds the view that, “The US has always been viewed as the number-one global safe haven in times of political or military uncertainty,” and that essentially at the onset of the war, investors sought out stable and secure places to put their investments until the war and global economic uncertainty subside. The net effect of this safe-haven appeal is seen in the way the Dollar Index gained 16.5% in 2022, moving from a low of 95.55 to reach a two-decade high at the 114.67 level.

Going into 2023, the USDIndex is expected to remain strong versus other global currencies, and this will mainly be driven by risk dynamics, and the inflationary environment that’s expected to continue well into 2023 and early 2024, as well as the war between Russia and Ukraine, which is expected to slow economic growth in Europe and exacerbate the energy crisis well into 2023 and potentially even spill over to 2024.

Numerous unforeseen factors may arise that could affect the strength of the Dollar, and chief among those is the Federal Reserve and its policy stance on interest rates for the year ahead. Most pundits and market participants are expecting the FED to continue its hawkish stance in the fight against record-high inflation, the likes of which was last experienced in the late 1970s and early 1980s. Whilst 2022 was a year that saw the most well-known indicator of inflation (CPI), which measures the percentage difference in the price of a basket of goods and services consumed by households, surge and peak in June above 9%, some market participants have made the bold speculation that inflation has reached its peak and that a downtrend will ensue well into 2023.

This softer inflation expectation can be attributed to how hawkish the FED has been by raising interest rates six times in 2022, which has gradually driven demand for goods and services down resulting in a gradual decline of the consumer price index and had the net effect of moving the federal funds rate from zero at the beginning of 2022 to almost 5% by the end of 2022. Economic experts at the Federal Reserve Bank have mixed expectations that core PCE will begin to fall to about 3.1% in 2023, which is still a distance from the 2% target, which could take some time to reach, spanning from 2023 to potentially 2025.

Nevertheless, market participants are expecting the Federal Reserve to incrementally keep raising interest rates into early 2023 even if it may be at a more conservative pace, and then pause at some point in the year before a pivot on policy. The expected outcome is that inflation will gradually keep declining, which will give the central bank the necessary signal to pivot away from their tightening cycle, and this will have major implications for the economic outlook of the US Dollar in 2023.

USDIndex Review

A stronger Dollar has been the theme of the global economy in 2022 and is likely to persist well into 2023.
The Federal Reserve will keep raising interest rates in response to inflationary data before a pivot on the tightening cycle.
Inflation may have peaked at 9% in June 2022 and is expected to gradually subside in 2023 to 3.1%.



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Ofentse Waisi

Market Analyst – HF Educational Office – South Africa

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