Only a handful of commodity currencies have appreciated this year

Most currencies will face further downward pressure for the rest of 2022

A strong US dollar will drag on profits for US-based multinationals, who will see lower international revenues in USD terms for the rest of this year—even if dollar appreciation slows or reverses course (due to time lags). A strong dollar also makes US corporations less competitive in international markets. Multinationals based in Europe, Asia, and elsewhere will be less directly impacted. Continued dollar strengthening, after many currencies have already seen double-digit percentage declines this year, opens up a raft of negative effects in 2023. Watch for deepening economic malaise in the worst-hit emerging markets, high inflation in markets experiencing currency depreciation, and deteriorating debt dynamics for markets with high US dollar liabilities.

Overview

Since mid-2021, the value of the US dollar against a global basket of currencies has been on a relentless tear: as of July 27, the US dollar is worth 16% more than it was a year ago, and its value now stands at its highest in 20 years. Dollar gains translate to a fall in the value of other currencies against the US dollar.

The worst performers in 2022 include the Turkish lira and Argentine peso—already under pressure for most of last year; the Egyptian pound, which suffered a sharp devaluation in March after Russia’s invasion of Ukraine prompted investors to withdraw funds; and the Pakistani rupee, whose value has fallen in line with a deepening economic crisis.

In contrast to previous episodes of dollar appreciation, developed-market currencies have fallen as much as emerging-market currencies. The Japanese yen is down 16% since January 1, 2022; the British pound is down 12%, and the euro is down 11%. Although the Australian dollar and Canadian dollar had held on for much of 2022 thanks to solid terms of trade amid a commodities boom, rising inflation and central banks’ failure to keep pace with Fed rate hikes have brought their currencies under pressure in recent weeks.

Our View

We expect the dollar to continue appreciating for the rest of 2022, albeit at a slower pace than in Q2. A weakening US growth outlook may take some air out of the US dollar, but this effect will be outweighed by rapid monetary tightening by the Federal Reserve and many global headwinds, which will drive investors toward US assets.

Most currencies will continue going the way they have this year, which means more depreciation against the USD for most currencies.

Across markets, currency performance for the rest of 2022 comes mostly down to two factors: how well the currency’s central bank keeps pace with aggressive Fed rate hikes, in absolute terms and compared to current market expectations, and where commodity prices go in H2 2022.

The first factor spells continued downward pressure on the euro, the Japanese yen, and several other Asian currencies, as their central banks remain unable or unwilling to make a hawkish turn. The euro is now at serious risk of falling below the value of the US dollar for the first time since 2002.

The second factor determines the fate of commodity currencies, including the Chilean peso, Peruvian sol, Brazilian real, South African rand, Australian dollar, and Canadian dollar, which benefit from high commodity prices. On the flip side, high commodity prices drive depreciation for commodity-importing countries.

Recent spot price declines across a range of metals, energy, and food commodities forced a reversal of fortunes for commodity currencies, which had previously been performing well in 2022. Overall, we expect commodity prices will recover from recent declines, but most won’t return to peak prices reached after Russia’s invasion.

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