The US dollar is forecasted to maintain its strength through the end of 2023, despite traditional weakness in the November-December period. This strength is driven by US macro outperformance and a hawkish Federal Reserve. High US rates, described as risk-negative events, are positively influencing the dollar while adversely affecting pro-cyclical currencies in Europe and Asia.
Despite these trends, softer US macro data could potentially lead to a weaker dollar. However, significant shifts due to Chinese or European growth re-ratings are seen as unlikely. Notably, high US rates causing disruptions in the financial sector could result in a brief surge in dollar value due to tightened funding conditions.
Year-end forecasts anticipate the EUR/USD exchange rate at around 1.05/1.06 and USD/JPY nearing 150. Yet, these predictions are not without significant threats. A looming Eurozone recession struggles to revive the Stability and Growth Pact, and potential geopolitical disruptions causing an oil price hike could impact the expected rise of EUR/USD to 1.10 by next summer and 1.15 by the close of 2024.
A slowdown in the US economy is predicted in the upcoming quarter, which could lead to currency predictions being revised. As we transition into 2024, a drop in the short end of the US economic curve is foreseen ahead of anticipated Fed easing next summer. This could result in Dollar depreciation, but it's unlikely to relinquish its gains before this year concludes.
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