A hundred dollar bill.
The dollar strengthened against most currencies in the world in 2022.
Uncertainty in the markets may maintain its value even at the beginning of 2023 (Photo: ShutterStock)
The dollar started the year with a sharp increase, but recently experienced a correction, and since the beginning of the year the dollar basket in the world has strengthened by 9%.
The significant factors that have affected the dollar in the past year are faster monetary contraction in the US, fears of an inflationary outbreak and global recession, and fluctuations in the markets. The
increase in the dollar interest rate was faster than the interest rate increase in other developed countries and led to the widening of the interest rate gap between the US and other countries, making the The dollar to the safe currency that carries the highest yield.
A factor that supported the attractiveness of the dollar as a carry currency and leads to strengthening in the first nine months of the year.
However, the expansion of the interest rate gap has been extinguished, in light of the approach of the end of the interest rate hike in the US, and therefore does not support the continued strengthening of the dollar. On the other hand, we estimate that the dollar interest rate will fall faster than the interest rate in other developed countries, a process that is mostly embodied in the markets and supported the weakening of the dollar in the last two months .
Currencies in the world: how much did they fall against the dollar? (Photo: Discount Bank)
High volatility, but a strong opening in 2023
At the same time, the declines in the world's capital markets supported the rise of the dollar, given its role as a safe asset, while other financial assets known as safe havens, such as gold, the Japanese yen, and the Turkish lira, had difficulty functioning as a safe asset. As a result, the negative correlation of the dollar with the stock market strengthened, and it functions As a hedging device against declines in the stock markets, therefore, continued uncertainty in light of fears of a global recession and fluctuations in the world's stock markets in the first half of 2023 will affect the dollar exchange rate, with declines in the capital markets supporting the strengthening of the dollar globally, and vice versa.
The damage to economic activity also supported the strengthening of the dollar, because "B was less affected by global events such as the war in Ukraine, the corona virus in China and more.
The US economy is expected to continue to be stronger than other developed economies in 2023 as well, however, the impact on exchange rates is not significant.
The dollar reached its peak in September, following the crisis in Great Britain, which led to sharp fluctuations in the markets and registered an appreciation of 19% since the beginning of the year.
However, in recent months the strengthening of the dollar has been restrained, against the background of the moderation of inflation and the decrease in interest rate expectations in the US, the exhaustion of the effect of the widening of the interest rate differentials between the US and other developed countries, the easing of lockdowns in China and increases in the stock markets.
Therefore, the chance of another significant move in the dollar is low, however, it is premature to eulogize the dollar, in light of the high uncertainty that is expected to continue in the coming months and the role of the dollar as a safe haven.
Events such as concerns about the worsening of the economic damage in the world, signs of a renewed increase in inflation and more, will lead to the strengthening of the dollar and vice versa.
As long as there is no sign of a change in trend and a stable recovery in the world economy, the dollar will continue to enjoy its status as a safe haven, but, the volatility of the dollar exchange rate in the world in 2023 is expected to be higher.
The author is Einat Meir, Macro and Markets Analyst, Discount Bank
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