Dollar: markets worried about a crash in 2023

After an exceptional 2022 for the dollar, 2023 promises to be more difficult. While a crash, feared by the markets, is unlikely in the months ahead, the greenback will nonetheless have to cope with a deteriorating economic climate, against a backdrop of inflation and economic recession in the United States.

The rise of the dollar at the expense of other major currencies

In 2022, the geopolitical context and rapidly rising inflation prompted investors to turn to dollar-denominated assets, seeking to protect themselves with a safe-haven asset or take advantage of rising interest rates.

The greenback also benefited from the difficulties experienced by the euro and renminbi, due respectively to the war in Ukraine and China's zero Covid policy. The yen and sterling also bore the brunt of the dollar's rise, which had less impact on emerging currencies.

However, things are about to change, and 2023 should mark the end of the dollar's overvaluation. Its performance has already fallen from 15% to 7%, as markets have been anticipating the coming economic recession in the United States for several months.

In addition, currencies such as the euro and yen will benefit from the monetary policy of the European Central Bank and the Bank of Japan, which, unlike the US Federal Reserve (Fed), will continue to raise their key rates.

This year, for the first time in 17 years, the dollar gained more than 10% against the yen, euro and pound sterling, the 3 other major currencies. In fact, in 2022, at its peak, the greenback gained 30% against the yen, 18% against the euro and 26% against sterling.

A less favorable situation in 2023

The dollar's correction in the last quarter has not prevented it from remaining overvalued, but the world's leading currency will weaken next year due to a number of factors. Firstly, the Fed's rate hike cycle will soon come to an end, narrowing the gap with other major currencies. Secondly, economic activity will contract in the United States, leading to a probable recession in 2023, while once the Covid-19 epidemic recovery is under control, the Chinese economy will regain its strength.

However, even in the event of a severe U.S. recession, a dollar crash is far from inevitable. Despite 9 recessions since the 1970s, the dollar has only fallen twice, between 1972 and 1974, and again between 1994 and 1995. However, the threat of a dollar crash is worrying the markets, as the consequences would be disastrous. Just as oil is essential to the global economy, so too is the dollar to finance, as the link between markets and currencies.

However, if the greenback does weaken in 2023, the decline should be short-lived. In the current energy crisis, US oil and gas production is a major asset, and the relocation of many industries will bolster US competitiveness. All these factors will help the US economy to recover and the dollar to strengthen.