Signs that aggressive Fed tightening are beginning to have an impact on the U.S. economy have intensified investor bets on a slowing pace of interest rate hikes, which has led to a sustained weakening of the dollar recently. But a number of Wall Street investment banks believe it is too early to bet on a downhill dollar, given that the Fed's rate hike cycle may not be close to its peak yet.
Fed officials appear to be divided on the pace of further tightening. Philadelphia Fed President Patrick Harker said officials could raise rates "well above" 4 percent this year, while Chicago Fed President Charles Evans said excessively high rates could come at a high cost and "there's a lot of uncertainty about how restrictive the policy will be." ”
While the dollar index hit a one-month low on Thursday, fund managers at JPMorgan Asset Management and Fivestar Asset Management are convinced that dollar dominance will not end.
The ICE dollar index fell as much as 109.54 on Thursday, but then rebounded sharply, closing the day at 110.57.
(ICE dollar index daily chart Source: FX168)
Solid US GDP data supported the dollar. The U.S. Economic Analysis Bureau reported on Thursday that the U.S. economy posted positive growth for the first time in the third quarter of 2022, at least temporarily, easing recession fears. Specific data show that the preliminary annualized rate of real GDP in the United States recorded 2.6% in the third quarter, the highest since the fourth quarter of 2021, after recording negative growth for two consecutive quarters.
The two central banks unexpectedly turned doves
Investors are considering the direction of the dollar after the Bank of Canada raised interest rates by a weaker-than-expected amount, sparking speculation that other central banks would turn dovish.
On October 26, the Bank of Canada announced a 50 basis point rate hike to 3.75%, lower than market expectations of a 75 basis point rate hike. Since March this year, the Bank of Canada has continuously raised interest rates to fight inflation, raising interest rates by 25 basis points in March, 50 basis points in April and June, 100 basis points in July, and 75 basis points to 3.25% in September.
At its meeting earlier in October, the RBA unexpectedly raised interest rates by only 25 basis points, raising the cash rate to 2.6%, below the consensus expectation of 50 basis points. Prior to this, the RBA had raised interest rates by 50 basis points in a row.
RBA Deputy Chairman Michele Bullock said in a speech that although the RBA unexpectedly raised interest rates by only 25 basis points this month, its policy rate trajectory is still steeper than most other countries.
USD rally likely to peak?
The dollar's four-month rise has rippled globally, with many currencies falling to multi-year lows and import costs soaring in developing countries.
Analysts point to the strength as a headwind for companies that do business primarily overseas and suffer from negative exchange rates.
The strength of the dollar has prompted intervention, with policymakers from Japan to Chile intervening to protect their currencies. However, these measures have had limited success.
The dollar's streak has prompted strategists such as Sera Ayako of Sumitomo Mitsui Trust Bank Ltd. to believe that the dollar's strength may soon end.
"It will take some time to confirm whether the dollar has peaked, but the situation has begun to show that the dollar will peak," Ayako said. ”
Jim Cramer, a US financial personality and former hedge fund manager, said on Monday (October 24) that the dollar may peak soon.
The host of CNBC's Mad Money said: "The market has long been hit, and a strong dollar has become a heavy burden around the neck of the market. Now, according to Carley Garner, the chart suggests that the dollar may be peaking. "Carley Garner is a well-known market technical analyst.
"Everything else — stocks, commodities, bonds — has seen a pullback this year," Kramer said. In Garner's view, the dollar is the last holdout, and she doesn't think that will last. To explain Garner's analysis, Kramer looked at weekly charts of the dollar index since 2017.
Kramer noted that according to Garner, the dollar has seen a "dramatic top," with the last three peaks following trend lines dating back to 2016. The USD is just below the trend line, which is the upper limit of resistance and potential reversal point. Garner expects the dollar to fall if it fails to break that ceiling. Kramer said Garner wouldn't be surprised if the dollar index fell to 105.
Wall Street warns: The dollar has not yet reached an inflection point
But dollar bulls remain undaunted, arguing that the Fed's hawkish stance, fears of a global recession and rising geopolitical tensions in Europe should only boost demand for the dollar.
Iain Stealey, international chief investment officer at J.P. Morgan Fixed Income, said: "It's hard to see why the dollar is weakening from now on. The Fed has not yet reached its terminal rate, and the U.S. economy may look more resilient than some other economies. ”
Brown Brothers Harriman Win Thin, head of FX strategy at New York, wrote in a note that while the dollar is likely to consolidate ahead of next week's Fed policy meeting, "the fundamental backdrop for the dollar remains positive." ”
Bart Melek, head of commodity market strategy at TD Securities, said: "It may be too early to talk about stopping rate hikes... We don't expect a turnaround, as inflation will remain an issue for most of next year. ”
Hideo Shimomura, senior portfolio manager at Five Star Asset Management, agrees that the dollar will not stop rebounding.
"I don't think the dollar has an inflection point yet, and that may not come until we have a clearer view of how much the Fed will raise," Shimomura said. ”
This article is sourced from FX168 Global Investments