The surging dollar will drop next year as the US slips into recession and the Fed cuts interest rates, Wells Fargo says

US dollar printing
The dollar has surged in 2022.
EVA HAMBACH/Getty Images

  • The dollar is set to fall in 2023 as the US enters recession and the Fed cuts rates, Wells Fargo said.
  • The bank's economists expect the dollar's surge to continue this year as interest rates rise further.
  • But Wells Fargo is expecting Fed rate cuts in 2023 that should push the dollar into "cyclical decline."

The dollar will start to give up its major gains in 2023 as the US economy tips into a recession and the Federal Reserve is forced to cut interest rates, Wells Fargo analysts have predicted.

The greenback has surged this year as the Fed hiked rates harder than other central banks, drawing investors in lower-rate countries back toward the US. Doubts about the global economy have also boosted the dollar, which is seen as a "safe-haven" asset.

Wells Fargo economists told clients in a note Tuesday that they expect the dollar to continue to rise in 2022. They believe the Fed will hike interest rates by 75 basis points for the third time in a row in September, further boosting the US currency.

Yet they think the dollar could peak in the fourth quarter before entering a period of "cyclical decline" against other global currencies.

Wells Fargo forecasts the US will fall into a recession by early 2023 as inflation and rate hikes catch up with the economy. A sharp slowdown will prompt the Fed to slow its tightening of monetary policy and to start cutting rates again toward the end of the year, it predicted.

"As those rate cuts are signaled, priced and implemented, we expect the US dollar to trend lower over the course of the 2023," the bank's economists, led by Nick Bennebroek, said.

They see the gap between the level of interest rates in the US and abroad narrowing as the Fed pulls back.

"With interest rate differentials swinging back in favor of foreign currencies next year, the greenback should enter a period of cyclical decline against most G10 currencies as well as certain emerging currencies," they said.

Wells Fargo said it expects the euro, the second-most traded currency, to fall as low as $0.96 in the fourth quarter of this year as the dollar strengthens, from $0.995 on Wednesday. But its predicted drop in the greenback should lift the euro to $1.02 by the end of 2023.

The dollar index has risen more than 13% this year as the Fed has hiked rates at the fastest pace since the 1980s. It was little changed at 108.6 on Wednesday, not far off a 20-year high touched in July.

A strong dollar makes imports into the US cheaper, helping to cool inflation. But it also reduces the value of American companies' foreign earnings, and piles the pressure on foreign countries by reducing the value of their currencies and increasing the cost of servicing their dollar debts.

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