US Dollar has upside through the end of this year and into the early parts of 2023 – Wells Fargo

The US dollar should remain strong against more currencies; however, the peak may be approaching earlier than initially expected, according to analysts at Wells Fargo. They believe medium-term dollar strength will be most pronounced against emerging market currencies.

Key Quotes: 

“Our short to medium term view on the U.S. dollar is unchanged, and we continue to forecast a stronger greenback against most foreign currencies through early 2023. With the U.S. economy now likely to fall into recession and the Fed to start cutting policy rates, we now believe the dollar will peak in mid-2023 and start to gradually weaken in the second half of next year.”

“Dollar strength should persist through early 2023; however, peak dollar strength may be approaching earlier than we initially expected. As the Fed eases monetary policy in late 2023, we believe the dollar's rise should slow by the middle of next year and the greenback should eventually start to weaken against most foreign currencies. We continue to believe Latin American currencies will be the outlier. Political risks and mature tightening cycles should keep Latin American currencies from strengthening during our forecast horizon.

“We believe the Fed will act more aggressively than the European Central Bank as well as the Bank of England, which should keep the dollar on sound footing against the euro and the pound for at least the next few quarters. In addition, with the Bank of Japan unlikely to adjust monetary policy settings for the foreseeable future or intervene meaningfully to halt depreciation, we believe the yen can continue to reach new lows against the greenback. We do, however, believe the Canadian dollar could be more resilient to broad U.S. dollar strength. As mentioned, BoC policymakers have turned more hawkish, and we look for Canadian policymakers to broadly match Fed rate hikes in the short term.”