Has the U.S. Dollar Officially Peaked?

  • Forex Analysis

The U.S. dollar is trading near multi-month lows against its major counterparts on expectations the Federal Reserve may slow down its hiking campaign. The pullback in the dollar index could extend on reports China may finally amend its zero-COVID policy, which would slow demand for safe-haven assets and increase the appeal of risk assets.

The dollar began declining after the latest consumer price index print showed that inflationary pressures are easing in the U.S., raising hopes among investors that the Fed may ease the pace of interest rate hikes after delivering four consecutive 75-basis-point increases.

The Chinese government announced it would ramp up vaccination efforts for the elderly population in a bid to facilitate the country’s reopening from the latest coronavirus restrictions and prop up the troubled economy, sending commodity currencies higher.

Furthermore, Chinese officials reportedly adopted a more appeasing stance toward public protests and demonstrations that picked up speed over the past few days as residents grow tired of the government’s stringent zero-COVID policy. It has been reported on Tuesday that China is relaxing its lockdown policy to support economic activity.

Focus Shifting Back to Fed?

While China may be finally set for reopening, investors are waiting for Fed Chairman Jerome Powell’s speech this Wednesday, where the central bank boss could provide additional hints about the Fed’s policy plans.

Many expect Fed Chair Jerome Powell will stick to the script – i.e. hawkish rhetoric – and not change stance after a single lower-than-expected inflation print. The focus will then shift toward the next CPI reading in December as the market seeks to gain more insight into inflation trends.

All in all, the latest developments raise a question about whether the greenback’s unprecedented rally this year is approaching its end. The dollar has lost more than 4% in the most recent quarter, after hitting a 20-year high in August. Last week marked the first time investors turned bearish on the U.S. dollar in more than a year.

Goldman Sachs strategists noted that investors are growing anxious for signs of a “fundamental shift,” with investors increasingly worried about not missing out on gains amid high market volatility.

Apart from slower inflation growth and a potential change in China’s zero-COVID policy, warmer weather in Europe has also contributed to more optimistic economic forecasts as it alleviated concerns over the energy crisis this winter.

On the other hand, there are also several significant risks that could easily change the current optimistic tone in the markets. If President Xi Jinping and Chinese lawmakers cling to the zero-COVID policy it could notably impede the growth of the world’s second-largest economy and ward off global investors, as well as fuel another potential rally in the U.S. dollar. The greenback rose earlier this week after the Guangzhou government announced a five-day lockdown in one of its major districts.

Further, other factors like uncertainty around the Fed’s future plans and the ongoing war in Ukraine could also affect the outlook for Europe and other global economies.

What Are Forex Strategists Saying?

Even some of the biggest dollar bulls this year, including JPMorgan (NYSE: JPM ) and Morgan Stanley (NYSE: MS ), are turning bearish on the greenback as cooler-than-expected October inflation data raise hopes over a more dovish approach by the Fed. If that happens, it could substantially increase the appeal of the euro, yen, and other national currencies that have been battered in recent months.

“Markets now have a better grasp of the Fed’s trajectory,” said Kerry Craig, a strategist in Melbourne at JPMorgan Asset. “The dollar is no longer the straight, one-way buy we’ve seen this year. There’s room for currencies like the euro and yen to recover.”

However, a long-term bear run on the dollar could have a major impact on forex markets, as the USD is a part of 88% of all forex trades.Yet, such a bear run could have broader effects beyond just the currency markets, including easing the pressure on European economies caused by imported inflation and slashing the food prices for developing economies, among other things.

The Bloomberg Dollar Spot Index, which tracks the greenback’s performance against 10 of its biggest peers, is down over 6% from its September high. Meanwhile, the world’s reserve currency has also dropped against all of the 10 rival currencies in the past month, declining as much as 7% against the Japanese yen and New Zealand dollar .

Abrdn’s James Athey thinks the Fed is aware of the delayed effects interest rate hike would have on price growth. Meanwhile, the divergence between the U.S. and Japan’s monetary policy has “reached its limit,” he added.

If both China and Europe weather the upcoming period better than anticipated, it could provide a boost for their respective currencies against the U.S. dollar. Citing these factors, Nomura strategist Jordan Rochester believes the greenback may have peaked against a basket of currencies.


Whether it has peaked or not, a weaker U.S. dollar could reduce the rampant costs of food and energy, as well as alleviate worries for governments with high U.S. dollar debts. While the near-term focus lies on China and likely loosening of strict zero-COVID policy, the expectations surrounding the Fed and bond yields will continue to determine the direction for the greenback.

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