The Fed rolls the dice on the global financial markets

The challenges facing the US dollar in 2023

By Raed Alkhedr | @raedalkhedr | 24 February 2023

fed rolls the dice
  • US dollar suffered significant declines since the end of 2022

  • Challenges facing the USD in 2023 include geopolitical tensions and threats to its value in international trade

  • Economic data, especially US jobs data, has been supporting the US dollar in early 2023

  • US Federal Reserve members are split on the need for continued interest rate increases to control inflation and support the US dollar

We discuss the challenges facing the US dollar in 2023, as well as the impact of economic data on the dollar and gold prices. The future of the US dollar remains uncertain, and any changes in economic conditions or statements from Federal Reserve members could have a significant impact on the currency.

The Fed rolls the dice on the global financial markets.

Since the end of last year, the US dollar has suffered significant declines against most of the major currencies. After the dollar index, which measures the value of the currency against six major currencies, reached levels close to 115, reversed its uptrend since last October to continue its decline.

Why did the US dollar decline at the end of last year?

The most important challenges facing the US dollar in 2023 is the continuation of global geopolitical tensions. The US dollar is facing major international challenges imposed by attempts to abandon its value in international commercial transactions. Facing a threat to its value is considered one of the most important factors affecting the future of the US currency in 2023.

The US Federal Reserve Chairman assessed this point critically several times. In a few of his common speeches, as abandoning the dollar in international trade will reflect a decline in its dominance over the markets.

On the other hand, despite the US Federal Reserve's statements that it will continue to raise interest rates in 2023, the markets were expecting the Fed to start fixing the interest rate by the second half of 2023, according to CME Group. There was even a percentage expecting the Fed to return to reducing interest again by that time.

The markets were stubborn about the US Federal Reserve's statements.

Throughout the past period. US Federal Reserve members, especially the Governor, Jerome Powell, were supposed to support the US dollar, not the other way around.

These statements always confirmed the bank's intentions to continue tightening monetary policy and raise interest rates during the current year. It is at a time when US inflation rates are stabilizing away from the targets desired by the bank.

However, Global markets had another opinion about the inflation data often emphasized as the slow pace of growth, even if it was still far from the desired goals.

In addition, the economic conditions had begun to suffer from the negative repercussions of raising interest rates, and the risks of the global economy slipping into recession began to escalate. It made the markets prepare for the US Federal Reserve to start adjusting its monetary policy, even if it continued to raise interest rates at a slow pace.

Economic data prevented the collapse of the dollar!

Since the beginning of this year, economic data continued to support the US dollar. The most important data that strongly supported the US dollar was the US jobs data. The data showed persistent growth of the labor market and of the US economy, despite fears of a slowdown in the growth of the world's largest economy, adding more than half a million jobs, which was more than double what was expected. Whereas the unemployment rate fell to its lowest level in 53 years.

The data highlighted the strength of one of the most important sectors the US Federal Reserve monitors to determine its monetary policy. The sector registered growth despite higher borrowing costs, lower consumer demand, and a cloudy economic outlook.

The matter did not stop at this point, but a series of positive data continued to dominate global markets, such as retail sales data, which confirmed the recovery of the US economy.

On the other hand, while the performance of the US economy continues to improve, inflation data slowed down as well, but at a slower pace than expected, disappointing markets.

Inflation data is still stable near 6.5% levels, far from the desired goals set by the Federal Reserve, which targets an annual price increase of 2%.

Causing market frustration especially to the US Federal Reserve, which reduced the pace of rate hikes at its February meeting to only 0.25 basis points. Sending inflation numbers down but not as per the Fed or market expectations, rising fears that a larger basis point increase could still be needed in the coming period.

What do we expect from the US Federal Reserve?

Most members of the US Federal Reserve began to stress the need to continue raising interest rate to control inflation on the other hand, that the conditions of the US economy continues to improve signally more negative repercussions that could result in raising interest rates.

US Federal Reserve member Loretta Mester considered it appropriate to raise the interest rate by 50 basis points at the March meeting, which would support the US dollar level.

Likewise, James Bullard, another fed member official, stressed that the additional interest rate increases will continue, considering the beginning of the decline in inflation rates, indicating that the country’s economy is growing faster than it was in the second half of 2022, thus enhancing the strength of the US dollar.

Therefore, the US dollar may remain vulnerable to any changes that may occur, whether in the economic conditions and data or any statements of the Federal Reserve members and the intentions and directions of the bank in the coming period.

What about gold prices?

The gold market continues to struggle as prices remain below $1900 an ounce and despite gold's correction this month, prices have room to fall further as yields remain high while inflation pressures continue to ease.

The future of the US dollar remains uncertain, and any changes in economic conditions or statements from Federal Reserve members could have a significant impact on the currency.