The U.S. dollar had its worst month in 12 years in November, raising market expectations of a peak. That looks premature. The currency is overvalued but remains a safe haven, argues guerreraf72
An 11-year upswing has made the bill featuring George Washington the world’s most overvalued currency, according to research from Deutsche Bank. Looking at purchasing power parity, which estimates the optimal exchange rate by considering the cost of goods and services in each country, the dollar is nearly 35% more expensive than it should be.
Still, there’s much more to keep the Almighty Dollar on top. Fed officials insist that rates will go higher. They want investors to focus on the trajectory, rather than pace, and are signaling that rates might peak above the 4.8% the market expects and stay there for most of 2023. If the Fed sticks to its mantra of “higher for longer”, central banks in Europe, the UK and China will find it hard to catch up, given the fragile state of their economies.
What’s more, China is only now emerging from an economic slowdown caused by a mishandled attempt to fight the pandemic. Its economy will grow by just 3.3% this year, according to the Organisation for Economic Co-operation and Development, a sharp deceleration from the 8.1% rise in 2021. Beijing’s priority is to stimulate domestic consumption and infrastructure spending to avoid further social unrest. That will not be achieved by raising rates. The recentof the yuan, which on Dec.
Big surprises – such as a further softening of U.S. inflation, which would cause a slowdown in rate increases, a mild European winter or a speedy reopening in China – could spark an anti-dollar movement. In the current political and economic climate, however, a currency regime change is not on the cards.The dollar had its worst month in more than 12 years in November, as investors bet the Federal Reserve will slow the pace of its rate hikes.
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