Forecast for USD (US Dollar) in 2022; USD performance against main currencies
This article looks at the trend in the US dollar forecast in 2022.
Bank forecasts for the US Dollar in 2022
The U.S. dollar has been moving broadly higher since May 2021 as the US economic recovery ramps up and as the Federal Reserve started to rein in support for the economy.
According to analysts at ING the US Dollar could continue to rise in the coming year. Exchange rates are typically driven by central bank monetary policy. Analysts at the bank believe the Fed has more reason than most other central banks to raise interest rates in 2022..
Analysts at HSBC also predict that the USD will rise in 2022 supported by slowing global growth and the Federal Reserve starting to gradually raise interest rates. They also suggest that if global growth accelerated, the USD could move lower.
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What’s the impact of a weak US Dollar (USD)?
Let's examine likely reasons the US dollar could weaken from current forecast levels:
- The US economy is the largest economy in the world, it has many international trade links and many commodities are also priced in US Dollars. This explains why the value of the USD can influence other economies and other currencies.
- A weaker USD is favourable to other countries which import US goods, as these goods become cheaper.
- However, a weak USD also reduces the amount that American consumers can purchase which means that they buy less. This could cause imports into the US to fall, which is also bad news for those foreign companies that export to the US.
What’s the impact of a strong US Dollar (USD)?
- In the same way that a weaker US Dollar can influence other economies and currencies so can a stronger US Dollar.
- A stronger US Dollar means that American products are more expensive for international buyers. As a result exports could fall which is bad news for the American exporters.
- Meanwhile, a stronger US Dollar means that American consumers can buy more, so imports could rise. This is good news for countries which export to the USA.
What are the key influences on the US dollar?
The US Dollar is often influenced by the health of the US economy, politics and trade.
1. US Economy
- When the US economy grows and unemployment falls the US Dollar often rises. Meanwhile when the US economy slows, the value of the US Dollar often falls. The US economic recovery is expected to continue in 2022 supporting the USD.
- When the cost of living, or inflation rises in the US, the USD often moves higher. Inflation rose sharply heading towards the end of 2021 which helped the US Dollar rise and is expected to rise at the start of 2022 before easing lower.
- US politics can have a big influence on the US Dollar. In 2021 the Biden Administration passed several spending bills which helped the US economy in its recovery from the pandemic.
- Policies favouring the US economy often help the US Dollar rise. More pro-economy spending bills could help the US Dollar higher.
- However, the US Dollar could fall if the Biden Administration wants to raise taxes.
3. Imports and Exports
- A currency performs well when both imports and exports are growing contributing to strong economic growth.
- The US is the world's largest importer and is the world’s second largest exporter (second to China). The US imports more than it exports but this hasn’t stopped it from being one of the most productive economies in the world.
GBP/USD performance in 2022
- Major banks broadly see the Bank of England raising interest rates in 2022 as the UK economy continues to recover from the pandemic.
- A robust economic recovery in the UK would match that of the recovery in the US keeping the currencies relatively stable around 1.33-1.35.
- Brexit issues also look set to drag on well into next year as the UK and the EU continue to try to resolve issues surrounding trades and the Northern Ireland border.
EUR/USD performance in 2022
- The US central bank, the Federal Reserve are expected to start raising interest rates before the European Central Bank, as the economic recovery and jobs market recovery accelerates ahead in the US.
- Given that a currency will often rise when interest rates are hiked, most major banks expect the EUR/USD to remain depressed in 2022.
- Analysts broadly agree that EUR/USD could reach 1.10 by the end of next year
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US Dollar against other currencies
- India was hit hard by the pandemic in early 2021. However, with covid cases continuing to fall and vaccination rates rising the outlook for India is improving, which is good news for the Rupee.
- Big companies going public on the Indian stock exchange have also supported the Rupee in 2021 and could continue to do so in 2022.
- Major banks broadly expect the Canadian dollar to weaken slightly against the US dollar over the coming year.
- The price of Canada’s main export, oil, is expected to fall in 2022 after rising steeply across 2021. A fall in the price of oil could hurt the value of the Canadian dollar.
- Meanwhile, a stronger US economic recovery in 2022 could boost USD/CAD toward 1.30.
- The Japanese Yen has been the worst performing major currency in 2021.
- The yen is considered a safe haven, so when the general mood in the market is upbeat, as it has been across 2021 amid the pandemic recovery, demand for the yen often falls.
- Should the market mood remain upbeat in 2022 the yen could continue falling.
- So far, the Bank of Japan has not indicated in any way that it is looking to raise interest rates, which is also hurting demand for the yen.
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