The strength of the dollar has been the talk of the currency trading world for most of the year. The U.S. dollar index, which measures the value of the dollar against a basket of global currencies, hit a two-decade high in September. It has also hit all-time highs against several major currencies in recent weeks, including the British pound. Several market participants now believe that the dollar’s rise, driven by the Federal Reserve raising interest rates more aggressively than other central banks, may fade over the next three to six months. Analysts expect the dollar to decline against 18 of 38 currencies in the fourth quarter of this year, according to FactSet data. Additionally, they expect the decline to widen to 10 more currencies for the second quarter of next year. CNBC Pro solicited opinions from four investment banks and broker-dealers on where they see the dollar heading. UBS UBS sees selling the dollar against G-10 currencies as a “best investment idea for 2023”. The Swiss bank said it will be less about investment choices and more about portfolio rebalancing that could cause the dollar to sell off. According to the investment bank, years of negative interest rates have led to a large accumulation of unhedged dollars around the world. For example, Japan’s largest pension fund holds more than $500 billion in dollar assets, only a small portion of which is hedged, he said. As the dollar index hits its highest level since 2001, UBS says these investors will start selling dollars to reduce their risk of future losses. The bank suggests traders look at the worst USD put options, derivative contracts that rise in value when the dollar falls, against a basket of currencies such as EUR, JPY and GBP. ING The Dutch multinational bank thinks that if the dollar will strengthen in the short term, the Federal Reserve will probably sound the “all clear” on further rate hikes around March next year. But the Fed’s pivot alone might not be enough for the dollar’s decline, says Chris Turner, global head of markets at ING. “You need the pull factor of some growth in the Eurozone or China to pull money out of what could be a 5% yielding dollar by 2Q23,” he said. he declares. Turner warns that the dollar’s decline could be delayed if inflation proves “stickier” than expected and pushes the Fed to raise rates higher. He says when the time is right, and it’s not now, traders could consider “sell spreads, which would not be subject to time decay.” BCA Research analysts at BCA Research say that from a technical standpoint, the dollar is due for a reversal. Echoing UBS’s view, BCA Research also suggests that “long-term investors should start selling the dollar strong.” The Montreal-based investment research group also said several catalysts could add downward pressure on the dollar, including central banks catching up to the Fed with rate hikes or a pick-up in Chinese economic activity, among others. “In our view, we are only halfway through this checklist, but nonetheless, the conditions are setting in place for a bearish US dollar stance,” said Chester Ntonifor, currency strategist at BCA Research, in a note to customers. Goldman Sachs The Wall Street bank remains bullish on the dollar over the next three months and sees some G-10 currencies only recovering past the six-month horizon. However, Goldman favors the Brazilian real, among certain other currencies, in the short term against the dollar following the election of Luiz Inacio Lula da Silva. “Brazil clearly stands out with a sustained decline in inflation, rising real rates and a favorable FX macro backdrop that should continue to drive foreign inflows into Brazilian assets among investors with a global mandate,” said the team led by Kamakshya Trivedi, head of global FX, rates and EM strategy at Goldman Sachs.
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