Macroscope | US dollar’s bull run set to end as China, Europe and Japan stabilise

The US dollar had a historic bull run in 2022. As the US Federal Reserve raised interest rates rapidly in a bid to combat inflation, the dollar strengthened by around 10 per cent from the start of the year to a high in October 2022 against a broad range of currencies.

Other major central banks such as the European Central Bank (ECB) also turned hawkish amid a global surge in inflation, but the Fed remained at the vanguard of the central bank raising cycle. In addition, the US dollar surge last year was supported by the relative resilience of the US economy in the face of the energy crisis in Europe and a lingering drag from the Covid-19 pandemic in Asia.

However, the US dollar has trended weaker after reaching its peak in October 2022. The nominal broad dollar index fell around 6 per cent between October 2022 and January 2023. Many of last year’s drivers of US dollar strength appear to be reversing.

The recent improvement in the global growth outlook has been mainly led by major economies outside the United States. The rapid reopening of China is likely to lead to a strong economic recovery this year after Covid-19 infections appeared to peak in late December.

China’s purchasing manager surveys pointed to a rebound of business sentiment in January amid signs of normalisation of supply chains. High-frequency data during the Lunar New Year holiday also indicated a solid recovery in services consumption.

Thanks to the removal of pandemic restrictions and falling case counts, tourism revenue during the holiday period was up 30 per cent year on year, with movie box office revenue surpassing 2019 levels.