A collective view continues to emerge amongst the global investment community on further US dollar strengthening.
In particular, HSBC Holdings Plc. predicts that the global reserve currency will strengthen next year given the weaker global economic outlook.
The dollar should rise as fragile growth in Europe and China affects risk appetite and drives demand for assets linked to the US economy, HSBC strategists wrote in a report. All major currencies have fallen against the US dollar over the past month, with emerging-market heavyweights such as the yuan and Indian rupee being near record lows.
“As tightening begins to bite, a faltering global growth outlook should further benefit the counter-cyclical dollar.”
A resurgent US currency has spurred dollar bears to reassess their bets on everything from the Australian dollar to the yen. Even as the global outlook turns bleaker, the US will look relatively more appealing and the dollar can withstand any Federal Reserve policy easing cycle, in HSBC’s view.
The bank now sees the euro falling to 1.03 per dollar in the first quarter of 2024, compared with a prior estimate of 1.15. The yen may weaken to 148 per dollar in the same period, a marked flip from its earlier call of 132.
Meantime, hedge funds like K2 Asset Management and AVM Capital have echoed HSBC’s view that the dollar’s gains have more room to run. Swap traders are pricing in about a 50% chance of one more US rate hike before the end of the year, further burnishing the dollar’s appeal.
With “a more difficult outlook for Europe, China and other economies, the market could increasingly see downside risks to global growth and embrace the broad dollar further,” HSBC wrote.
The stance of some Fed officials reinforces the outlook for a stronger US currency.
In particular, Dallas Federal Reserve Bank President Lorie Logan said that more policy tightening will likely be needed to get inflation down to 2%.
“In coming months, further evaluation of the data and outlook could confirm that we need to do more to extinguish inflation," she said.
"Economic activity is picking up — contrary to expectations that the economy would slow down," Logan said. "To sustain low inflation, supply and demand need to be in balance. Last year, labor demand greatly outpaced supply."
The Japanese currency, however, faces the opposite situation.
Japan's GDP data was released today:
Japan's GDP YoY growth for Q2 stood at 4.8%, with a forecast of 6.0% and a previous reading of 3.2%.
Japan’s GDP QoQ for the same reporting period shows growth at 1.2%, with a forecast of 1.5% and the previous value of 0.8%.
These figures suggest a slowing economy. Thus, imminent monetary tightening is unlikely, as it would be detrimental to economic growth prospects.
The Japanese yen, which is now near its lowest level against the US dollar in more than three decades, may continue to fall if the central bank keeps interest rates low, predicts the chief executive officer of Suntory Holdings Limited Takeshi Niinami.
The currency could fall to 170 yen per dollar, a level last seen in 1986, he said in an interview in Tokyo on Thursday. Higher interest rates may still be a few years away as the Bank of Japan needs to manage any risk to the economy from sudden hikes, he said.
Niinami’s prediction is even more bearish than last quarter’s top forecaster for the yen, Tohru Sasaki, JPMorgan Chase & Co.’s head of Japan markets research, who sees it weakening to 155 per dollar next year.
The current situation speaks in favor of further growth of USDJPY.
The following trading strategy can be suggested: buy USDJPY with the subsequent fixation of profit or loss at the end of the current year.