The two rates hikes expected from the Federal Reserve (Fed) are the main reason to expect a stronger US dollar next year, in the view of economists at DBS Bank. In 2023, the greenback is set to weaken due to a more bening US growth below 3%.

USD to depreciate as US GDP growth turns more benign in 2023

“In 2022, we expect the USD to strengthen worldwide into the two Fed hikes we forecast for 4Q22. The Fed has dropped the “transitory” tag for inflation and opened the door to accelerate the tapering of asset purchases and to bring forward rate hikes next year. The story for the USD would change if the Fed loses credibility in reining in inflation.”

“Although we expect the USD to be stronger a year from today, the ascent will be bumpier compared to 2021. Expect more market rotation from the Fed and other central banks taking turns to normalize monetary policies. EUR, the most significant component of the USD Index (DXY), could become more volatile from Germany pushing to reduce public debt levels across EU nations in order to free the European Central Bank to fight inflation.”

“A reversal in the USD’s uptrend will be difficult to achieve without a healthy and synchronized global recovery. Under the worst-case scenario, Omicron turns out to be deadly and existing vaccines are less effective against the new variants. Given China’s covid-zero policy and plans to lower banks’ required reserve ratios, CNY is considered too strong at a six-year year high against a basket of currencies.”

“In 2023, we expect the USD to depreciate as US GDP growth turns more benign below 3%. The Fed should wrap up its last hike in 2Q23 from signs of US inflation slowing towards its 2% target again. Once again, this would depend on a more constructive global economy preferably one where growth is led by Asia.”