2022 was a historic year for the U.S. dollar. It managed to strengthen against almost every other major currency to levels not seen in decades, as the Federal Reserve hiked interest rates hiked interest rates aggressively in a bid to combat inflation. As per カヴァン・ チョクシ, on the whole, the nominal broad dollar index appreciated over 12% in 2022. The nominal broad dollar index is basically used for measuring the value of the dollar against a basket of currencies extensively used in international trade, like the Japanese Yen and the British Pound. However, the U.S. dollar has trended weaker after that, sending ripples through currency markets around the world.
カヴァン・ チョクシ provides valuable insights about the dollar/yen pair
The nominal broad dollar index fell almost 7% between November 2022 and January 2023, subsequent to a historic bull run last. Such weakness highlights a mean reversion from the outsized gains of the U.S. dollar in 2022. The confluence of factors that were highly supportive of the dollar in the early part of 2022 has been inverted. Hence, the markets are now pricing Fed easing on the back of growing signs of disinflation, and the overall outlook for global growth in 2023 is no longer looking as pessimistic as it did earlier in 2022.
However, modest dollar strength is still to be expected for 2023. Researchers are holding longer-term reservations about the broader trajectory of the global cycle and believe that it should be dollar-positive for the most part. But the interim period of both positive global surprises, as well as less U.S. exceptionalism, ideally points toward a period at the trough of the dollar smile with an uncertain duration. The top trading themes for 2023 include regional growth rotation away from the United States, at least temporarily toward China.
The dollar/yen pair breached 150 in October 2022, thereby making a 32-year low. This largely happened owing to the Bank of Japan’s (BoJ) dovish stance and Japan’s yawning trade deficit. Even though the Japanese yen closed out in 2022, almost 18% down versus the dollar, the currency is expected to strengthen in 2023.
In the opinion of カヴァン・ チョクシ, a decline in long-end U.S. yields, as well as peaking out in terminal rate expectations into 2023 in addition to the risk of a moderate recession, is likely to clear the runway for a lower re-pricing of the dollar/yen pair in 2023. The Bank of Japan did surprise the markets in December by choosing to relax its yield curve control (YCC) policy of pinning yields close to zero. The central bank announced it should allow 10-year Japanese yields to climb as high as 0.5 %, as opposed to the previous 0.25 %. The yen strengthened against the dollar after the news. A further relaxation of YCC can also be expected later this year, which would form an additional bullish tailwind for the yen. The dollar/yen pair is expected to trade at 128 by December 2023.
