Major Currencies More Stable in 2023?

As inflationary pressures continue to subside, major currencies of the world’s superpowers are on the course of stability. Central banks have recurrently hiked interest rates to destimulate red-hot economies which have been scorched by macroeconomic instability and growing concerns of imminent recessions.

USD Cooling Down

The U.S. dollar was on a relentless frenzy of escalation in 2022, fueled by supply & demand imbalances, soaring energy prices, fresh COVID-19 cases in China and other demoralizing drivers. The Federal Reserve did not think twice in aggressively hiking interest rates to tame inflation, and the diminishing dollar index reflects a recovering market.

Given expectations that the Federal Reserve will be less aggressive with future rate hikes, the focus will center around the brightness of data from around the world.

Euro on the Rise

Arguably the hardest-hit from the bunch, the euro deteriorated to 20-year lows as the Russia-Ukraine war skyrocketed energy prices, and the closure of the highly-utilized Nord Stream 1 has further-constrained energy supply in the continent. This created havoc and ensued record-high inflation, growing investor skepticism and higher consumer reluctancy to spend and invest.

ECB, historically hesitant to bump interest rates, has followed suit of other major nations in their approach towards combating inflation, startling markets after hiking rates by a larger-than-expected amount in July.

The short-term outlook seems optimistic, but gains may be limited as the Eurozone bond market is not exhibiting much robust growth.

Chinese Yuan Rockets

One currency to look out for would be the Chinese yuan. Its stability was heavily hindered by recurrent fresh COVID-19 waves which prompted authorities to apply city-wide shutdowns; halting business activity and expenditure on a large scale. Consequently, the attractive yuan continued to tumble in 2022.

The Asian nation’s pivot away from its stringent ‘COVID-zero’ policy played an important role in spreading optimism regarding recovery. With restrictions being lifted, the yuan has kickstarted its journey of recovery.

While business and consumer activity are on the rise, exports may remain constrained as the global economy weakens, and foreign exchange market conditions may remain volatile which’ll cap the growth of the Chinese yuan in the short-term.

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