Despite many expectations about de-dollarization trends and a new world order, the dollar emerges from the summer season in poor health. The clear driver remains a surprisingly strong US economy in the face of deteriorating business trends in Europe and especially China. This dollar strength is starting to look unpleasant, as inflation fears have not fully subsided in the rest of the world and the weakness of the local currency does not help.
The million-dollar question, then, is whether this American “exceptionalism” can last. Our economists think not. We believe that American consumers will have exhausted their pandemic savings in the coming months and that tighter credit conditions will take their toll on U.S. businesses and employment trends. We expect a much stronger Fed easing cycle in 2024 than the market currently values and expect the dollar to turn lower during 4Q23.
The weak outlook for the European manufacturing sector means that EUR/USD gains will be difficult to come by. Our year-end forecast of 1.13 may once again be too aggressive. However, the long-awaited upward slope of the US yield curve should reflate commodity-linked currencies in the coming months and even high-beta currencies like the Swedish krona.
Emerging currencies are showing some notable divergences. In Asia, Chinese authorities will continue to battle renminbi weakness until the dollar’s trend turns. A surprisingly large rate cut in Poland has raised some doubts about premature easing and weighed on the zloty. While in Latin America some aggressive flexibility cycles are being carried out. However, fears that Banxico wants a weaker Mexican peso appear exaggerated.