• USD suffers biggest weekly loss since September
  • Some analysts warn that further losses are possible
  • Profit taking mentioned but other risks loom on the horizon
  • BoJ to discuss rate hike as ECB worries about inflation

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The US Dollar rallied in the final session of the week but was walking hurt after taking heavy losses against all of its major counterparts and some analysts have warned that its downward correction could drag on over the weeks and months to come.

U.S. exchange rates were more stable on Friday but still posted their biggest weekly declines since September after remarks by Federal Reserve (Fed) Chairman Jerome Powell were followed by a wave of selling on Wednesday that many have perceived as profit taking by speculative traders.

“Adjectives like painful/nasty/absurd all seem appropriate, but in hindsight an overexposed USD was taken from the factory,” says Credit Suisse trader Jonathan Pierce.

“We have moved into the gap in EUR and JPY, as we still see value in tactically buying back this USDCHF decline while above 0.9085,” Pierce and colleagues said. in a market commentary on Thursday.

Recent losses have been large, but some warn they could spread further in the near term now that market prices have fully recognized the likelihood that Federal Reserve interest rates will be raised three to four times this year.

The dollar had rallied for six months prior as market participants made their biggest bet on the currency since the start of the coronavirus crisis, although it came under pressure this week after President Powell seemed to agree with the market’s expectations for the Fed’s interest rate.

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Above: The US Dollar Index displayed at weekly intervals with major moving averages indicating possible areas of technical support, while Fibonacci retracements of the 2020 decline indicate possible areas of technical resistance.

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“There are several factors that could weigh more on her in the short term. But we think the Fed’s increasingly rapid shift to tighter policy will eventually push the greenback higher against most other currencies this year,” said Jonas Goltermann, senior economist at the global markets team at Capital Economics. “We see two reasons to believe the dollar will resume its rally.”

While some have warned that further profit-taking could potentially keep the dollar on its feet for some time to come, many analysts and economists still expect the greenback to rise further against other major currencies for the future. year 2022 as a whole.

Goltermann and his colleagues said on Thursday that central banks outside the United States are unlikely to meet high market expectations for their own interest rates, which means there is a risk of disappointment for their currencies that could potentially support the dollar over the next few months.

But they also say investors’ assumptions about the future peak in U.S. interest rates are likely too low, citing market prices that this week suggested the Fed Funds interest rate would likely hit around 1.75% d here the first months of 2024.

Capital Economics has told clients that borrowing costs in the United States will likely rise more than this and sooner than investors believe, giving it market-wide recognition as a potential catalyst for the next step higher in dollar exchange rates later this year.

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“Extensive positioning likely left the dollar vulnerable early this year and it has weakened against any signs of weaker inflation – for example, yesterday’s December US PPI reading,” said Chris Turner, Head of Global Markets and Regional Head of Research for UK and CEE at ING. .

“DXY [Dollar Index] broke below strong support earlier this week (resistance now at 95.15/20) and looks like it could drop a further 0.5% to the 94.10 area. But we would view this move as corrective and expect the dollar to start finding support ahead of the January 26 FOMC meeting,” Turner also said.

While future upward revisions to Fed interest rate expectations could lift the U.S. currency further at the end of 2022, dollar bulls could be vulnerable in the meantime to any signs of a reversal in the US currency. inflation, given that the statistical base effects are expected to weigh on the year rates for much of this year.

Meanwhile, the dollar would also be vulnerable in the coming weeks if upcoming policy decisions from the Bank of Japan and the European Central Bank confirm that inflationary pressures are also beginning to worry policymakers in Tokyo and Europe.

This is after Reuters reported on Friday that BoJ policymakers will likely discuss at this month’s meeting when is the most appropriate time to start raising interest rates and how to communicate this due to the recent increases in Japanese inflation.


Above: The exchange rate between the euro and the dollar is displayed at daily intervals alongside the USD/JPY.

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“Like almost every country on the planet, Japan is experiencing inflationary pressures, but you have to look more carefully in Japan and the data still suggests a different picture of inflation. There is a BoJ policy meeting next week and we would be very surprised to hear Governor Kuroda give much credence to this story,” said Derek Halpenny, Head of Research, EMEA Global Markets and International Securities at MUFG.

Further and in Europe, ECB Vice President Luis de Guindos told a conference hosted by UBS on Thursday that continental inflationary pressures are expected to surprise on the upside from Frankfurt’s forecast this year.

“Inflation is expected to decline in the course of 2022, stabilize at levels above the pre-crisis level towards the end of the year and pick up again from 2023 due to an accommodative monetary policy. ‘Inflation is expected to decline more slowly this year than we expected when we presented our annual outlook at the end of November,’ says Dr Jorg Kramer, Chief Economist at Commerzbank.

The Guindos vice-chairman was just the latest in a growing line of board members and market participants to voice concern that the ECB may have been premature in December when it said the inflation had probably already peaked and could fall back below the bank’s 2%. goal next year.

Few market analysts see the BoJ or the ECB as likely to change their stance on interest rates any time soon and while their thinking may ultimately prove correct, this skepticism would heighten the impact on the market. in case either starts to report a move.

“The ECB seems more relaxed about the situation and is trying to look through the current high inflation, not signaling any rate hikes for at least 18 months,” said Thomas Flury, chief investment office strategist at UBS. Global Wealth Management.

“We do not yet expect EURUSD to rebound, although fair value calculations suggest the euro will eventually strengthen and historical observations show that the USD has often topped shortly after the breakout. beginning of the U.S. rate hike cycle,” Flury and his colleagues said. Friday.