Relief for Global Investors as USD's Peak Marks End of World's Most Painful Trade

Top investors are betting that the worst of the dollar's rampage is over, and the currency is now entering a multi-year decline. The dollar’s peak has passed, and a weaker dollar is now expected as the bulk of Federal Reserve rate increases is over, and virtually every other currency will strengthen as their central banks keep tightening. Investors believe the relief that a weaker dollar will bring to the world economy cannot be overstated. A weaker dollar will help lower global inflation, and it's likely to boost the price of everything from gold to risk assets such as equities and cryptocurrencies. Some market participants see the Fed opting for modest rate increases, which is at odds with the US central bank's assessment that inflation remains a worry, and further hikes are needed to bring it down to the 2% target.

The yen has already climbed more than 12% against the greenback, and strategists surveyed by Bloomberg see it gaining a further 9% by year-end. The euro has risen about 11% from the low reached in September, and the greenback has lost ground against most of its Group-of-10 peers in the past three months. Some investors are already testing the theory that the dollar’s dominance is over. Abrdn turned neutral on the greenback late last year from a long position, while Jupiter Asset Management is shorting the US currency outright.

A weaker dollar will benefit developing nations by lowering import prices and help ease inflation. A strong dollar in 2022 deepened poverty and turbocharged inflation from Pakistan to Ghana. With the dollar’s decline, other currencies that suffered under its weight are likely to strengthen. Currencies such as the yen, the euro, and the Bloomberg JPMorgan Asia Dollar Index are already advancing, and this trend is expected to continue.

In conclusion, the dollar's decline is a significant event, as the world economy has been significantly impacted by its strength in the past. A weaker dollar will help ease the inflation that it caused and improve global sentiment, boosting the price of assets. Many investors are testing the theory that the dollar's decline is a multi-year trend, and a shift to risk assets from equities to emerging markets is already underway on bets that the greenback's strength will ease. This shift will have a positive impact on developing nations by lowering import prices and easing inflation.

Footnote:

Adapted from source: Carson, Ruth. "The World’s Most Painful Trade Is Finally Ending as Dollar Peaks." Bloomberg, 24 Feb. 2023, www.bloomberg.com/news/articles/2023-02-24/usd-dollar-strength-peaks-bringing-relief-for-global-inflation-trade