The US dollar enjoyed an extraordinary rally in 2022, with the ICE U.S. Dollar Index jumping from 96 in January to 114 on September 28th, a 20-year high (the index measures the value of the dollar against a basket of foreign currencies). We think the forces that pushed the dollar higher were the Federal Reserve raising interest rates at the fastest pace in 40 years (higher rates tend to make a currency more attractive to own) and investors seeking a safe haven (the dollar has historically benefitted from periods of global distress). That strong dollar was both a blessing and a curse to the global economy and market. Here at home, it tamped down inflation, but around the world, it drove inflation higher (as most commodities are priced in dollars, so goods priced in dollars became more expensive outside the US); it weighed on ex-US earnings for US multi-nationals (as overseas earnings were worth less when converted into dollars); it drove up borrowing costs for companies and countries around the world that had issued dollar-denominated debt (as they needed more dollars to service their debts), and it aided US consumer spending (as a strong dollar allowed us to buy more of what other countries were exporting).
But, since hitting that late 2022 high, the ICE U.S. Dollar Index has fallen to 102, which has many market participants wondering what ails the dollar, and what a declining dollar means for the global economy and markets in 2023. We think a few forces have pushed the dollar lower, including the Fed being closer to the end of its rate hiking campaign than the beginning; ex-US central banks becoming more hawkish and an improvement in fundamentals for key economies around the world, including lower energy prices in Western Europe and China moving on from its Covid 19 driven lockdown policy. And that drop in the dollar has both aided a meaningful rally in ex-US equities (over the prior three months developed market equities are up 23% and emerging market equities are up 18%) and should prove to be a tailwind for US multinational earnings this year (as those overseas earnings will be worth more when converted into dollars). All things being equal, a weaker dollar should be a positive for the global economy and risk assets in 2023.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 103-BCI-1/18/2023