By David Finnerty, Bloomberg Markets Live reporter and analyst
Look for the dollar to have a good first quarter on the back of a hawkish Fed and deteriorating risk sentiment.
There are good reasons to expect the Fed to follow through on its hawkish dot plot given US core PCE data is proving to be sticky, and US employment data next week is forecast to show the labor market remains tight. China’s reopening has the potential to add to inflationary pressures if the surge in Covid cases spurs supply disruptions or via an increase in demand pressures.
Should the US central bank fulfill its hawkish predictions it would be a positive for the dollar as it would force investors to revise higher their expectations for the terminal rate, which are currently under 5%.
Deteriorating risk sentiment also tends to be a dollar positive. US equities are ending the year on the back foot which is an ominous sign for the start of 2023, particularly with earnings season fast approaching. Where US equities go other nation’s equities tend to follow. In addition, worries about a global slowdown aren’t going to help risk sentiment which is good news for dollar bulls.
Of course there are two sides to the dollar equation. How it performs will also depend on the euro, yen and sterling, which have large weightings in both the Bloomberg Dollar Spot Index and the Dollar Spot Index. Here though again there is reason to be optimistic for the dollar.
Both the euro’s and sterling’s rallies have stalled with them likely to come back under pressure in first quarter amid recession fears.
As for the yen, while the BOJ will more than likely amend its policy further next year, the summary of opinions to its December meeting signals that it may not be until after Gov. Kuroda leaves in April. That means US-Japan interest rate spreads should remain wide in the first quarter limiting the yen’s