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The dollar’s worst tumble in 12 years could be just the beginning — and the Fed ending rate hikes will fuel ‘ongoing weakness’, a UBS strategist says

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US dollarThe dollar could be set for more pain after suffering its worst quarter in 12 years, UBS strategist Dominic Schnider said Friday.

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  • The dollar’s recent slump will extend through 2023, according to UBS Global Wealth Management’s Dominic Schnider.
  • “Ongoing dollar weakness – that’s the main narrative,” he said Friday.
  • The greenback started 2023 on a weak footing, after the biggest quarterly loss since 2010 in the three months through December.

The dollar’s dismal performance in the final quarter of 2022 could continue through this year, with the Federal Reserve now close to halting its interest-rate increases, according to a UBS strategist.

Dominic Schnider, head of commodities and Asia-Pacific foreign exchange at UBS Global Wealth Management, said Friday that he’s forecasting further pain ahead for the greenback, with December’s lower inflation print giving the Fed more room to ease up on its monetary tightening campaign in the next few months.

“We probably are during 2023 going to see ongoing dollar weakness – that’s the main narrative,” Schnider told CNBC’s “Street Signs Asia” Friday. “It’s very simple – obviously the Fed is going to come to an end in hiking with the CPI number pointing in the right direction. We’re going to get only 25 basis points and probably not even go above 5%.”

The US Dollar Index – which measures the greenback against six alternative currencies – tumbled almost 8% in the October-December period, the biggest three-month decline since 2010. It had surged more than 17% during the first nine months of 2022 as the Fed raised borrowing costs at the fastest pace since the 1980s.

Rising interest rates tend to be bullish for a currency because it becomes more attractive to international investors seeking higher yields.

The dollar’s recent declines reflected market expectations that the US central bank is approaching the end of its current rate-hike cycle, with inflation showing a steady decline since mid-2022. The consumer price index gained 6.5% in December from a year earlier, the smallest increase in more than a year..

The euro and the Chinese yuan have bounced back against the dollar, with Europe managing to cope through the winter despite Russia’s efforts to disrupt its energy infrastructure and China finally reopening its economy after two years of harsh ‘zero-COVID’ policies.  

“More importantly, beyond [the Fed easing up on interest-rate hikes], is really the relative growth story, which is starting to pan out more favorable for China and Europe,” Schnider said.

The strategist expects the currencies to stay at or above their current levels of $1.10 and 6.5 yuan per dollar for the foreseeable future – which could mean that the dollar index’s struggles aren’t close to ending anytime soon.

Read more: King dollar’s worst slump in over a decade is hammering one of 2022’s biggest winners – but the greenback’s dominant run might not be over just yet

Read the original article on Business Insider
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