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Will USD Get Stronger in 2023 Despite the De-Dollarization Trend?
Sommario：After reaching unprecedented levels last year, causing widespread poverty and rampant inflation in countries like Pakistan and Ghana, the USD has now entered a phase that some analysts predict will be a multi-year decline. Nevertheless, some experts still maintain that the US dollar's dominance hasn't diminished significantly.
How is the USD Value usually determined？
The value of the USD is determined by supply and demand, backed by the creditworthiness of the issuing government. The methodology of determining dollar value trades can be divided into three groups: supply and demand factors, sentiment and market psychology, and technical factors.
Factors affecting the value of the USD include interest rates, inflation, trading relationships between countries, and monetary and fiscal policies. The value of the USD is determined in foreign exchange markets, and neither the U.S. Treasury nor the Federal Reserve targets a level for the exchange rate. Nonetheless, movements in the exchange value of the dollar represent an important consideration for monetary policy.
Sometimes, Fed monetary policy decisions and macroeconomic factors affect the USDs value as well. Learn What is Federal Reserve and how it controls USD Value!
Overview of the USD‘s performance so far in 2023!
USD Performance chart from Jan 2023 - June 2023
USD has fallen against major currencies this year, particularly EUR (from 1 USD = 0.90 EUR to 1 USD = 0.85 EUR) and GBP and JPY. Factors contributing to USD decline: rising inflation, Federal Reserve’s interest rate hikes, and the war in Ukraine.
Inflation increases USD lending costs, while investors seek safety in EUR and GBP due to the Ukraine conflict. Uncertain when USD will hit bottom, but if the Federal Reserve raises rates to counter inflation, USD may further decline. However, USD could appreciate if inflation decreases.
What is the Current Status of the De-dollarization Trend？
The BRICS group of countries – Brazil, Russia, India, China, and South Africa – are developing a new currency to compete with the US dollar (USD). Moscow and Beijing are leading the charge toward de-dollarization. The goal of de-dollarization is to protect national central banks from geopolitical dangers associated with the US dollar‘s position as the world’s reserve currency.
The reasons behind the dawn of de-dollarization are many, but the current escalation of hostilities between Russia and Ukraine has given a boost to the de-dollarization movement. The initiative gained momentum after Russian lawmaker Alexander Babakov, deputy chairman of the lower chamber of the Federal Assembly, was cited as claiming the BRICS countries were working on a new payment medium. De-dollarization is the process of making the dollar less indispensable in international trade. Increased investment in BRICS countries would lead to an increase in spending and economic development.
It is worth noting that, despite perceived issues with the US economy, the dollar has not significantly weakened. Even digital currencies have not provided a viable alternative to the dollar. However, it is important to recognize that no currency is infallible. Powerful currencies can collapse, but this usually requires a substantial trigger such as a significant political or economic event that destabilizes the domestic economy.
The British pound, for example, lost its global prominence after World War I devastated the local economy. The US dollar took its place and solidified its position after World War II. For the dollar to decline significantly, a similar catastrophic event or severe domestic instability would likely be necessary.
Find out Why Countries Are Shifting From USD to Yuan？
Analysts claim USD lacks a worthy competitor!
Despite the decline of the US dollar‘s dominance in global exchange, it is unlikely to lose its position as the world’s reserve currency anytime soon.
Here are some reasons why:
Benefits of the USD:
The US economys heft and stability, coupled with the free convertibility of the dollar, are unmatched by other alternatives.
The US boasts the world‘s deepest and most liquid financial market, burnishing its credentials as the owner of the world’s reserve currency.
The inconvenience of switching to alternative arrangements is a big deterrent, and any developing countries transitioning away from the US dollar face prospects of heightened exchange rate volatility, hurting trade, investment, and capital flows.
Challenges of alternative currencies:
The Chinese yuan has the economic might to back its claim to the throne but tight capital controls derail its global ambitions.
The Euro offers the easy convertibility of the dollar but is held back by the shaky economic and political stability of the European Union.
Expert opinions:
Joseph Thomas, Head of Research, Emkay Wealth Management, asserts, “The dollar has the backing of the largest open economy with a sound, well-managed financial system”.
Brad MacMillan, CIO, of Commonwealth Financial, remarks, “As long as the US is the largest open trading economy, as long as everyone in the world wants access to the US economy, and as long as it is a lot of work and a great inconvenience to switch, the position of the dollar as the global reserve currency is secure”.
Overall, the US dollar‘s position as the world’s reserve currency is still secure, despite the decline in its dominance in global exchange.
How will the USD perform in the second half of 2023？
The USD index (DXY) forecast for the rest of 2023 has been a topic of discussion among experts.
According to Reuters, the dollar index rose by almost 3% in February 2023 due to strong US economic data and revised expectations of interest rate hikes by the US central bank. However, analysts in a poll predicted that the dollar would trade lower against major currencies in the next 12 months.
Conversely, Nasdaq.com believes the US dollar index will rise in 2023 due to Federal Reserve rate hikes and safe haven buying.
Wallet Investor predicts the US dollar index may increase to 107.598 by the end of 2023.
International Banker forecasts the US Dollar Index (DXY) will peak at $115 in 2023.
Longforecast.com suggests the dollar index will start October 2023 at 103.98 points, rise to 104.17 points, and then fall to 101.09 points. By the end of October, DXY will reach 102.63, a -1.3% change from the monthly average of 102.97. By 2023, the DXY will reach 115.
Trading Economics forecasts the US dollar index to reach 107.30 at the end of 2023.
Consequently, while some experts anticipate an increase in the USD index for the remainder of 2023, others expect a decline. These predictions are subject to change based on economic and political developments.
Inflation fears can help ‘King Dollar’ stay high for the rest of the year
An analysis by Wells Fargo Investment Institute shows the U.S. dollar has risen recently due to financial instability fears. During the Federal Reserve‘s rate hikes in 2022, stocks and other financial assets plunged, with a surging greenback causing havoc worldwide. As the dollar pulled back from its September peak, some speculated that it might eventually lose its crown as the world’s reserve currency.
However, due to the fact that financial instability could force the Fed to respond with lower rates in response to financial instability, Wells Fargo Investment Institute believes that the dollar can stay high. Futures markets are pricing less than one 25 basis-point reductions by year-end, and the dollar is trading in the top half of its 2023 range.
Some argue that a rising nation like China vying to exert more influence in the global economy should reduce its dependence on the U.S. dollar as a global reserve currency. However, some say the dollar maintains the U.S.s global dominance because of its centrality to international commerce.
Due to its safe-haven appeal, the dollar strengthens during times of economic uncertainty and financial market volatility, raising the cost of financing dollar-denominated debt. Although the dollars global reserve currency status has been challenged, the reports of its death are exaggerated, since such debates are not new.
What is the Best Way to Forecast Forex Movements？
Forex traders can easily remain informed about current happenings and adequately prepare for significant events that impact currency prices, particularly those that are scheduled. It is essential for anyone involved in forex trading to have access to an economic calendar, which provides crucial information about economic and political events that are likely to influence forex and other financial markets.
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