U.S. dollar trends sideways on Wednesday after grim economic outlook

The greenback trended sideways on Wednesday after major U.S. banks forecasted that the economic situation would worsen in 2023.

The U.S. dollar index (DXY) — which compares the greenback against other currencies — gained less than 0.1 percent at 105.55 at the end of the session. The euro was relatively flat against the dollar at $1.048 after a 0.2 percent loss the day before. On the other hand, the sterling gained 0.13 percent and hit $1.215.

It was also flat against the Australian dollar at $0.6689 after data revealed that Australia's economic growth had slowed in the third quarter. The news came after the Reserve Bank of Australia signaled more benchmark rate hikes. Meanwhile, the New Zealand dollar gained 0.33 percent to rise to $0.6339.

The greenback, however, strengthened against the yen by 0.32 percent. This growth followed a 0.16 percent gain on Tuesday.

Investors have grown wary about the outlook for the U.S. dollar. Despite surging this year — even hitting a 20-year high — the dollar has plunged in recent weeks as more people expect the Federal Reserve to pause its interest rate hikes soon.

Some investors maintained that the dollar’s recent plunge had gone “too far,” adding that the grim outlook on the global economy should have boosted the U.S. dollar index. Investors typically avoid risk assets and opt for more stable assets like the U.S. dollar.

Commonwealth Bank of Australia chief of international and sustainable economics Joseph Capurso also said a projected recession could boost the currency.

“We've been forecasting a recession in the U.S., the UK, the eurozone and Japan ... It's part of our baseline,” Capurso said. “(That) will provide more support to the U.S. dollar as a safe-haven currency.”

Other analysts have shared their opinions regarding the outlook for the greenback entering 2023. Its strength is relative to other currencies, meaning it is affected by policies in other countries. Since all governments also use interest rate hikes to tame inflation, all nations are also experiencing an economic slowdown.

According to University of Chicago Harris School of Public Policy assistant lecturer Dave Schabes, the U.S. economy is in better standing than some other countries. Therefore, its interest rate hikes are justifiable.

“The U.S. can afford to do this because the U.S. economy is still fairly strong,” Schabes said. “While the Eurozone is suffering from weakness in several countries, exacerbated by the price increases both directly in natural gas and oil as well as the knock effects through the supply chain.”

Washington Center for Equitable Growth head of macroeconomic policy Michael Madowitz noted that the inflation in the U.S. had shown signs of slowing down, resulting in investors moving their funds from other countries to the U.S.

Schabes and Madowitz expect the dollar to maintain its growth in 2023 if the Fed continues to raise interest rates and the Ukraine War persists in Europe. However, they noted that other countries had made efforts to boost their currencies, which might balance out the forex index.

Yuan strengthens

Unlike the dollar, the Chinese yuan notably strengthened Wednesday after the Xi administration announced a significant change to its zero-COVID policy. The onshore yuan was up 0.26 percent to 6.977 per dollar.

The Chinese authorities now allow people with asymptomatic COVID-19 or mild symptoms to quarantine at home instead of going to government-specialized facilities. OCBC strategist Christopher Wong said the new measures showed the country's efforts to reopen its economy. Analysts, however, warned that the road to economic recovery for China would be “bumpy.”