Is the US dollar accumulating enough safe-haven strength coming into 2023?

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The US dollar will rebound against most currencies over the coming months (including the Mexican peso, of course), with the growing threat of recession in the U.S. and elsewhere keeping it firm in 2023 through safe-haven flows, according to market strategists polled by Reuters.

While most said there was not much scope for further dollar upside based on monetary policy, the threat of deeper-than-expected economic weakness and renewed inflationary pressure mean investors may be reaching prematurely for riskier assets.

Down over 5% in November, the dollar index had its worst monthly performance since September 2010, in large part on expectations the U.S. Federal Reserve is about to slow the pace of its rate hikes and that an eventual pause is near.

Speculative traders swung to a net short position on the dollar for the first time in 16 months in November, according to calculations by Reuters based on U.S. Commodity Futures Trading Commission data.

But the Dec. 1-6 Reuters poll of 66 foreign exchange strategists suggested the greenback will trade around current levels a year from now and hold on to its near-10% gains so far this year, despite its recent setback.

Nearly two-thirds or 33 of 51 strategists who answered an additional question said the greater dollar risk over the coming month was that it would rebound rather than falling further.

“Now that assets have re-priced, investors may be poorly positioned to face a period which could be characterised by persistent core inflationary pressures coupled with impending recession in Europe and potentially in the U.S. next year,” said Jane Foley, head of FX strategy at Rabobank.

“We foresee volatility levels remaining high in the coming months and expect it is too early for USD bulls to fully capitulate.”

While relatively better U.S. economic performance and higher interest rates compared to its major peers helped the dollar to outperform nearly every currency, that trade based on rate differentials was mostly nearing its end.

Source: Reuters

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