US Dollar to weaken starting in mid-2023 – Wells Fargo

According to analysts at Wells Fargo, the US Dollar will remain strong early next year, followed by a depreciation during the second half of 2023. As market participants begin to anticipate eventual policy easing in the US, they believe the greenback will start to trend lower beginning in mid-2023.

Key Quotes: 

“The over-arching theme for most of 2022 was that of U.S. dollar strength. In fact, the Federal Reserve's trade-weighted dollar index is up nearly 6% on balance since the beginning of 2022. We expect this theme of U.S. dollar strength to persist in early 2023 as U.S. economic trends remain resilient relative to other major developed economies, and as the Federal Reserve pursues a more aggressive pace of monetary tightening compared to other major central banks. With the Fed set to deliver rate hikes through March 2023, and most other central banks seen finishing their tightening cycles at a similar time, we believe the U.S. dollar index could gain a further 4%-5% by the end of Q1-2023.”

“But as the Fed ends its tightening cycle and U.S. economic trends worsen, we believe the greenback will enter a period of cyclical depreciation and weaken against most foreign currencies for the remainder of next year. We anticipate that dollar weakness will be broad enough such that most G10, as well as emerging market currencies, can strengthen vis-à-vis the greenback over the course of 2023.”

“In that sense, we believe 2023 could be ripe for emerging market currencies to not only recover against the U.S. dollar, but also outperform relative to G10 currencies.”