What Comes Next For The World's Top Currencies As The Fed Acts And Economic Uncertainties Around The World Rise?

The US dollar has dominated a number of competitors this year, including the euro, the Japanese yen, and the Chinese yuan. According to analysts of the foreign exchange market, the dominance of the dollar will not diminish anytime soon.

The Federal Reserve, whose officials target rising inflation with significant interest rate hikes in order to restrain economic development, is the main factor driving the increase in the value of the dollar.

On Wednesday, the Fed is set to increase rates for the sixth time this year, bringing the Fed funds rate from 2.25% to 2.5%.

While the Fed is in the spotlight, Marc Chandler, managing director of Bannockburn Global Forex, claims that investors' assessments of an economy's competitiveness can influence currencies in the medium term.

The weakening of the dollar's rivals is being caused by changes in the global trading environment and concerns about economic development. The US Dollar Index has risen 14% this year and reached 20-year highs.

Yen in Japan

The yen has lost 24% of its value relative to the US dollar in 2022. The dollar recently surpassed the 145-yen mark for the first time in 24 years.

The yen trade has been "fascinating" because of the Bank of Japan's commitment to asset purchases to maintain its 10-year yield at 0.25%, according to Edward Moya, senior market analyst at Oanda.

The BOJ has been tampering with its yield curve since 2016 in an effort to increase inflation.

Due to the Fed's aggressive rate-raising campaign, the yield on US 10-year Treasury notes has increased to around 3.5%, making them more attractive than Japanese bonds and devaluing the yen.

"Japanese inflation has been difficult to produce... And now that wage growth and inflation may be occurring simultaneously, the Bank of Japan may be forced to change its policies sometime in the coming year, according to Moya.

On Thursday, the Bank of Japan will release its newest policy statement.

Bank of America reports "no movement" in yield curve control despite interest rates being increased by central banks around the world (apart from China's).

The dollar will increase to 150 yen because of "rate differentials, concerns about depreciation, and capital flight," according to BofA.

According to Chandler, the third-largest economy in the world is currently experiencing a negative terms of trade shock.

"The majority of Japan's food and energy are imported. Prices of [its] produced items have increased considerably more slowly than those of food and energy.

As a result, Japan has switched from having trade surpluses to having trade deficits, similar to Europe.

He clarified a further factor that was dragging on the yen.

Euro

The common currency of the eurozone has lost 13% of its value versus the dollar this year, dropping below parity for the first time since 2002. Things could get worse.

In the fourth and first quarters of 2022 and 2023, Barclays predicts $0.9800. It was trading at $0.9950 on Friday.

The European Union is scrambling to stockpile gas before winter arrives as a result of Russia's curtailment in gas deliveries into Europe, which has driven up gas and energy prices.

"The eurozone economy is so fragile, and cost increases are causing a slump in the economy. Making ends meet is challenging for many people. Fawad Razaqzada, a market specialist at Forex.com, was interviewed by Insider.

"It has driven up energy input costs for businesses. The attitude toward the euro is relatively low, despite the [European Central Bank] boosting interest rates to control prices. The rate of inflation in the Eurozone hit a new high in August of 9.1%.

According to Moya, the whole cost of Europe's energy crisis might not be reflected in the euro until the winter, when it will be clear whether the continent has enough energy supply or not.

"The weather will have a big impact on this. The euro will have difficulty the rest of the year because Europe seems weak.

The euro will have difficulty the rest of the year because Europe seems weak.

Chinese Yuan This week, the yuan hit a two-year low against the dollar as the dollar price rose above 7 yuan. China's currency has lost about 10% of its value so far this year.

The People's Bank of China has been trying to support the market upward recently, including by fixing the currency's daily rate above what the market had anticipated as it gets ready for the next Fed rate hike.

On Friday, industrial production and retail sales for August both beat forecasts, although the yuan declined.

Without a doubt, the Chinese economy is in trouble, Razaqzada said. "Its zero-COVID policy kills the economy's growing momentum.

As long as the policy is in place, it is challenging to envision a solution for the yuan. He predicts that the dollar will soon trade at 7.20 yuan.

According to information revealed on Friday, sales and prices in China's real estate sector, a key driver of growth for the world's second-largest economy, decreased as well.

Prior to the data's release, Chandler said of the housing market, "Its cash register has broken down."

How may the harm be minimized and what is the future developmental model? He demands an explanation from China.