The next stage of the dollar bull market

The combination of aggressive tightening from the Fed and worsening risk appetite has driven the dollar to its strongest level, in aggregate, since the early 2000s. While the greenback looks due a pause, we now expect it extend those gains over the coming quarters as most major central banks struggle to match the Fed’s hawkishness (or, in some cases, ease policy) and economic growth slows more sharply in Europe and Asia than in the US. We think that this will lead to a dollar-positive further tightening of financial conditions as the recovery in global growth and trade slows further, and the risk environment worsens. We forecast EUR/USD to fall to parity; the renminbi to weaken to 7 per dollar, and the yen to fall further even after its precipitous plunge over the past couple of months. While we anticipate the greenback will give back some of its gains in 2023, we think the near-term risks to our forecast are skewed towards an even stronger dollar.