The US dollar: 4 factors that will end the rise, which currencies should you bet on?

The US dollar: 4 factors that will end the rise, which currencies should you bet on?

Since mid-July, the US dollar has posted a series of weekly gains against a select basket of currencies. the dollar index (Read here what the dollar index is and what currencies make up the basket) It has been rising for six straight weeks profit 4.4%. It also shows the appreciation of the US currency compared to other major currencies. the Euro/dollar exchange It rose from 1.128 in mid-July to 1.077, the lowest level reached this octave. the GBP/USD cable It fell from 1.3142 to 1.2561. to’US dollar/Japanese yen It increased from 137,315 to 146,525.

The US dollar was buoyed by economic data showing that the US economy has weathered the biggest difficulties in Europe and the UK, confirmed today by the recession in German GDP in the second quarter of the year. But against the yen, the opposite attitude of the two central banks prevails. As the Fed nears the end of its rate-raising cycle, the Bank of Japan has so far confirmed negative interest rates, which are unique among major banks.
the The scenario is about to change This could happen as early as the coming weeks according to Mark Hefell, chief investment officer at UBS Global Wealth Management, who explains the factors that will put a stop to the greenback’s rally.

Direction of the dollar index, daily candles – Source: Bloomberg

From Jackson Hole Provisional Payment of US Dollars

the The speech that Jerome Powell just gave in Jackson HoleThe Federal Reserve’s symposium is being held in Kansas City, which pushed the greenback higher. Powell emphasized that economic data will guide the Fed’s next moves and that further interest rate hikes may be needed.

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In the currency market, the US dollar reacted with bullish and bearish swings during Powell’s intervention, which later confirmed his strengths. However, the fuel for the upside may have been almost exhausted. For Mark Hefele, the level at which nominal interest rates are as close to the highs of the hiking cycle as they are with the real rate, and there are four reasons why it is essential to manage dollar positions effectively:

  1. slower growth due to the impact of monetary tightening;
  2. cut the federal interest rate;
  3. Reducing the difference in returns between the dollar and other currencies;
  4. structural factors.

US Dollar: This is why the streak is likely to end

The US economy has so far shown enviable resilience despite the sharp rise in interest rates. However, within the US, the effects of the Fed’s ultra-hawkish monetary policy are being felt. “The decline in excess saving in the US, linked to higher interest rates, is affecting consumer spending and the biggest impacts will be felt next year,” Hefeli explains.

the The economic slowdown is likely to increase In the scenario that consumer prices fall. Inflation for the month of July was 3.2% compared to 9.1% reached in July, and the core CPI is also slowing. So at long last 2024 will be the year interest rates will be cut by the Fed, which is an unfavorable factor for the US dollar.

“We believe the anticipation of rate cuts will push the 10-year US Treasury yield towards 3%-3.5% over the next 6-12 months, up from 4.3% today,” adds Chief Investment Officer at UBS GWM. The result will be a Transfer money from the US to emerging markets which will offer higher returns.

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Haefele finally takes note The structural weakness of the US economyHitherto hidden with unexpected resilience: dual fiscal and current account deficits, rating outlooks, higher US funds allocations, and higher dollar valuations. “We expect, he explains, that these factors will regain the upper hand once the advantage determined by the high yields offered by Treasuries diminishes.”

Below are the currencies in which you can diversify your investments

Among UBS GWM’s favorite currencies for diversification, the euro comes out on top. Instead, Swiss group analysts see the pound as well while those looking for a safe haven can turn to the Swiss Franc as an alternative to the US dollar.

Investors with a higher degree of risk tolerance should look instead to emerging currencies, with the Brazilian real, Mexican peso, Czech koruna, Indian rupee and Indonesian rupiah all considered top picks by UBS GWM analysts.

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