Probably approaching the final stage of the dollar rally

While the dollar has now reached a 20-year high and looks increasingly overvalued on a long-term basis, we think it will rise further in the near term as the global economy falls into recession and “safe-haven” demand increases further. Even if the FOMC will probably maintain a hawkish stance in the near term, we think the Fed is nearing the end of its tightening cycle, and we see limited scope for a further widening of expected interest rate differentials in favour of the greenback. But in most previous Fed policy cycles, the dollar continued to appreciate even after short-tern US interest rates peaked as rising safe-haven demand drove the greenback higher. With the global economy now clearly slowing and financial market fragilities worsening, we continue to think that a similar scenario will play out this time around, and that the dollar will appreciate further against most major currencies over the rest of this year and into the first half of 2023.

EM Drop-In (Thursday 3rd Nov): This 20-minute emerging markets briefing will take in our latest views on how the macroeconomic picture will inform EM financial markets, what Brazil’s election result means for the country’s economic outlook and our forecasts for Hungary’s forint and the Colombian peso. Register here.