Recession worries could support dollar after monstrous 2022 rally By

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – A breathtaking surge in the U.S. dollar trampled foreign currencies, gouged corporate profits and gave investors one of the year’s few winning trades. Though the greenback has stumbled in recent weeks, recession worries may keep it elevated in 2023.

At its September peak, the dollar stood at its highest level in nearly two decades after rising some 20% against a basket of currencies. Those year-to-date gains have been roughly cut in half as investors bet the Federal Reserve is closer to slowing the pace of the rate increases that helped fuel the dollar’s gains.

GRAPHIC-Mighty dollar, https://www.reuters.com/graphics/GLOBAL-MARKETS/gdpzqyzekvw/chart.png While rising U.S. yields were a key catalyst for the dollar’s rally, other factors played an important part in boosting the buck. Investors flocked to the dollar — a popular destination during uncertain times — to shelter from market volatility spurred by surging global inflation, spiking energy prices and Russia’s invasion of Ukraine.

Also heightening the dollar’s allure was the comparative strength of the U.S. economy during a time when fears of an energy crisis hammered European assets while stringent COVID-19 controls hurt China’s growth.

Even after paring some of its gains, the dollar is still on track for its best year since 2014. Fund managers surveyed by BoFA Global Research named it the market’s most crowded trade for the fifth straight month in November and a record number of survey participants said the currency was overvalued.

Still, a Reuters poll of 66 foreign exchange strategists suggested the dollar will trade at its current level around a year from now, with many expecting global central bank policy tightening to hurt growth and boost the greenback’s safe-haven appeal once again.

WHY IT MATTERS

Getting the dollar right is key for investors, as its trajectory sways everything from corporate earnings to the prices of raw materials such as oil and gold.

A stronger dollar makes U.S. exporters’ products less competitive abroad while hurting U.S. multinationals that need to exchange their earnings into dollars. The ‘s foreign exposure stands at around 30%, according to Bank of America (NYSE:), with the technology and materials sectors most vulnerable. 

Nike (NYSE:), IBM (NYSE:) and Meta Platforms were among the broad range of companies that warned of a hit from a stronger dollar this year. The dollar’s rally shaved about 8% from S&P earnings in 2022, according to Tom Lee, head of research at Fundstrat Global Advisors.

For the rest of the world, a stronger U.S. currency pressures the price of oil and other dollar-denominated commodities by making them more expensive to foreign buyers, while also making it more expensive for foreign companies and governments…