Macroscope | Is the US dollar’s long climb about to end? And, if so, where should you put your money?

Is King Greenback’s crown slipping? There is a narrative that suggests US dollar strength may be about to turn to weakness. If true, the trick for investors will be to identify those currencies that would gain most as a result. Asian currencies could be prime candidates. But there’s also the question of timing. 

Simon Derrick, chief currency strategist at US bank BNYMellon, highlighted last week how Federal Reserve chairman Jerome Powell has recently enumerated a number of headwinds facing the US economy. For example, Powell alluded to some weakness in the US housing market which, at least in part, may be attributable to higher mortgage costs in the wake of Fed rate hikes.

Markets have rationally begun to contemplate the possibility of fewer future Fed rate hikes than are currently priced and to explore the ramifications for a US dollar whose attraction has been enhanced by rising US yields in the wake of prior hikes.

France’s Credit Agricole CIB wrote on Friday that “the more cautious tone struck by several US policymakers recently has corroborated market expectations of a pause in the tightening cycle once the Fed has brought rates closer to neutral”. The greenback’s “recent lack of form may signal a turning point that may usher in the end of the reign of King [Dollar] in coming months”, the French bank argued.