Dollar Forecast April 2023

  For information purposes only

*Forward prices are the basis for 3-month FX forward contracts

US dollar

So far in 2023, the US dollar has given up record high levels against world major currencies seen at the end of 2022 after the other central banks worldwide including Europe and the UK increased their interest rate hike speed to catch up with the Hawkish US central bank. Euro traded on par with the US dollar for the first time in history in 2022, but each euro bought 1.1 US dollars at the end of March. Same for GBP going up from 1.1 to 1.23 US dollars. 

The weak momentum of the US dollar was exacerbated in 2023 by the liquidity crisis of the US regional banks that soon spread to Europe, taking down Credit Suisse. The bank was later announced to be taken over by the rival UBS.

What led to the collapse of Silicon Valley banks was the high-interest rates that cause the mismatch in the Bank's duration of assets and liabilities. The markets started to think that the record-high interest rates will cause harm in other parts of the economy and cracks will soon show up. If such a scenario materializes, the fear of inflation is no longer relevant and central banks may have to forego their interest rate hike program and lower the rates to stop the economy from entering a deep recession. The ECB, Bank of England, and the US Fed, however, increased interest rates again in spite of the banking crisis unfolding.

Such belief caused the bond prices to rally and US treasury rates to dip and showing two rate hikes by the US central banks by the end of the year. Meanwhile, based on Fed’s notes and trajectory, there are three more meetings in 2023 and each is expected to present another 0.25% of the increase in US interest rates which is not sitting at 4.75%.

Driven by the former (market-believed scenario), the US dollar continues to weaken which is currently still super strong against other world major currencies. However, if the US central bank officials continue with their hiking plans, the US dollar should remain strong for the rest of 2023, showing no signs of depreciation.

Canadian Dollar

Bank of Canada is still on pause with interest rates after moving them up to 4.5%. The Canadian housing market and households are too sensitive and may not be able to take more rate hikes. The interest rate differential is widening between US and Canada, driving the Canadian dollar lower against USD. Meanwhile, commodity prices including oil are showing weakness and are no longer supportive of a strong Canadian dollar. At this point, a lower Canadian policy interest rate seems to be the major factor driving the Canadian dollar value.

Some forecasts even expect the Canadian dollar to weaken to 1.45 against USD by the end of 2023 and will not appreciate until the end of the US Fed rate hike plan is over.