What's Next For The Leading Currencies Of The World As The Fed Acts And Global Economic Uncertainties Grow?

This year, the US dollar has dominated various competitors, including the Japanese yen, euro, and Chinese yuan, and analysts of the foreign currency market expect that this trend will continue in the near future.

The Federal Reserve is the key driver of the dollar's increase, with policymakers seeking to restrain economic growth by targeting rising inflation with large interest rate hikes.

On Wednesday, the Fed is set to implement its fifth rate hike of the year, increasing the Fed funds rate from 2.25% to 2.5%.

According to Marc Chandler, managing director of Bannockburn Global Forex, investors' opinions of an economy's competitiveness can serve as a medium-term driver for currencies while the Fed is in the spotlight.

Changes in the global trade climate and growth worries contribute to the weakening of the dollar's competitors. The US Dollar Index has achieved highs not seen in twenty years and is up 14% this year.

Japanese Yen

In 2022, the yen has lost 24% of its value versus the U.S. dollar. Recently, for the first time in twenty-four years, the dollar reached 145 yen.

According to Edward Moya, senior market analyst at Oanda, the yen trade has been "fascinating" as a result of the Bank of Japan's commitment to asset buying to maintain its 10-year rate at 0.25 percent.

The BOJ has been manipulating its yield curve to increase inflation since 2016.

As a result of the Fed's aggressive rate campaign, the 10-year US Treasury yield has increased to near 3.5 percent, making US bonds more attractive than Japanese ones and weighing on the yen's value.

"The Japanese economy has had difficulty producing inflation... And now we may be experiencing inflation alongside wage growth, which could push the Bank of Japan to alter its monetary policy early next year, as suggested by Moya.

Thursday will bring the next policy pronouncement from the Bank of Japan.

Bank of America anticipates "no shift" in yield curve control despite global central banks (except China) increasing interest rates.

BofA predicts that the dollar will rise to 150 yen owing to "rate differentials, debasement fears, and capital flight."

According to Chandler, the third largest economy in the world is experiencing a negative terms of trade shock.

"The majority of Japan's food and energy is imported. Food and energy prices have increased considerably more rapidly than [its] manufactured items.

Japan, like Europe, has consequently transitioned from trade surpluses to trade deficits.

He added another explanation for the yen's weakness.

Euro

This year, the shared currency of the eurozone has dropped 13% versus the dollar, dropping below parity for the first time since 2002, and things could get worse.

In the fourth and first quarters of 2022 and 2023, Barclays anticipates a price of $0.9800. Friday's trade price was $0.9950.

Gas and energy costs have skyrocketed as a result of Russia's decrease of gas exports to Europe, pushing the European Union to stockpile gas before winter hits.

"The economy of the eurozone is so weak that growing prices are pushing a recession. People have a hard time making ends meet Insider chatted with Fawad Razaqzad, a Forex.com market specialist.

"This has increased energy input costs for businesses. Despite the fact that the [European Central Bank] is hiking interest rates to control prices, attitude about the euro remains relatively negative." In August, inflation in the Eurozone reached a new peak of 9.1%.

According to Moya, Europe's energy crisis may not be fully priced into the euro until the winter season, when it will become evident whether or not the region has sufficient energy supply.

"This will depend greatly on the weather. The remainder of the year will be challenging for the euro due to Europe's seeming weakness."

The remainder of the year will be challenging for the euro due to Europe's seeming weakness."

Chinese Yuan The yuan reached a two-year low against the dollar this week, as the dollar surpassed 7 yuan per dollar. China's currency has lost nearly 10% of its value this year.

In preparation for the next Fed rate hike, the People's Bank of China has attempted to give upward support in recent weeks, including fixing the currency's daily rate beyond market expectations.

On Friday, August retail sales and industrial production surpassed expectations, but the yuan fell.

Razaqzada remarked, "Make no mistake, the Chinese economy is suffering." "Its zero-COVID policy saps the growing momentum of the economy.

As long as the policy stays in effect, it is difficult to envisage a way out for the yuan. He predicts the dollar-yuan exchange rate will soon hit 7.20.

According to data released on Friday, sales and prices in China's property business, a major growth engine for the world's second-largest economy, also declined.

Before the release of data, Chandler commented of the real estate market, "Its cash register has broken down."

"What is the future model of development, and how can damage be minimized?" China must respond, he believes.