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FX.co ★ The U.S. dollar is losing its appeal as a safe haven: what does this mean for the EUR/USD pair?

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Forex Analysis:::2023-02-03T15:42:42

The U.S. dollar is losing its appeal as a safe haven: what does this mean for the EUR/USD pair?

The U.S. dollar is losing its appeal as a safe haven: what does this mean for the EUR/USD pair?

A strong U.S. dollar was one of the main headwinds for gold and all precious metals last year as investors embraced the currency as a safe haven. But this forecast has changed dramatically in 2023 as inflation declines and monetary policy gradually changes.

Most likely, the U.S. dollar will continue to lose its appeal as a safe-haven currency.

While higher yields clearly worked in the dollar's favor last year, one must also consider how the dollar was exposed to shocks in 2022 due to geopolitical tensions in Ukraine, a spike in energy prices, and inflation, which is now declining.

The dollar, which has depreciated since hitting a 20-year high in September last year, is likely to fall further in 2023 as inflation eases, recession risks subside, and monetary policy eases.

The U.S. dollar is losing its appeal as a safe haven: what does this mean for the EUR/USD pair?

Even Federal Reserve Chairman Jerome Powell acknowledged that inflation is starting to come down. On Wednesday, he said, "It is gratifying to see the disinflationary process now getting underway... We can now say, for the first time, that the disinflationary process has started. And we see it really in goods prices so far."

And as markets approach the end of the Fed's aggressive tightening cycle, the dollar's appeal as a safe haven will dissipate, and overall risk appetite will recover. This could already have been predicted after the dollar peaked last September.

It is likely that the Fed will once again raise the rate, since the meeting sounded the phrase that it is necessary to raise the rate at a slower pace. This already happened at the February meeting, when the rate was raised by 25 basis points. The latest hike means the Fed has raised rates by 450 basis points since the beginning of this tightening cycle.

And once the Fed pauses, the dollar's yield advantage over currencies will shrink. This is especially true when it comes to the European Central Bank, which still has a lot of work to do in terms of raising rates. Naturally, this will affect the EUR/USD pair:

The U.S. dollar is losing its appeal as a safe haven: what does this mean for the EUR/USD pair?

On Thursday, the ECB raised interest rates by 50 basis points and signaled that more aggressive rate hikes are coming.

Another factor working against the US dollar is the reopening of China's economy.

Analyst InstaForex
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