The dollar should still strengthen significantly. There is a bear market in both stocks and bonds, and the dollar is pretty much the only safe haven available right now. This was reported by Ebrahim Rahbari, who heads currency market research at Citigroup, for Bloomberg. According to him, the strength of the dollar does not stem directly from the factors that usually influence events on currency markets, its basis is the effort to diversify the portfolio.
When could the dollar begin to weaken? The expert believes that government bond yields will play a significant role in this, especially in the US. Specifically, reaching a peak in yields, because this peak is the beginning of the time when bonds will regain their attractiveness, including as a diversification tool. The Japanese yen can also be an alternative to the dollar on currency markets, and the importance of yield development also applies in its case.
A significant turning point, which should also change the trends on the currency markets, should then be the moment when the American central bank starts reducing rates. Rahbari believes that “it will happen sometime in 2023”. We are now in an environment where there are expectations of further rate hikes. The direction may change sometime in the spring of next year, when the economy continues to weaken and inflationary pressures ease. The attention will thus ignominiously shift from efforts to reduce inflation to support economic growth.
When asked about the exchange rate of the dollar against the Chinese renminbi, the expert said that the Chinese currency is subject to strong “management” by the government. In the coming months, the currency should be influenced by the government’s stimulus in an attempt to support the cooling economy. According to the analyst, this should also be reflected in the commodity markets. According to the expert, the differences in rates are now most evident on the dollar-to-yen exchange rate, followed by the dollar and the renminbi.
In the following graph, TS Lombard shows real effective exchange rates for selected currencies. Specifically achieved maximums, minimums, average and current rate are marked. It is close to the minimum values reached after 2000 for the Japanese yen and the Swedish currency. The opposite is true for the dollar, the Australian or Canadian dollar is close to the average values:
Source: Youtube, Bloomberg, Twitter