What Will Happen To The World's Leading Currencies As The Fed Acts And Global Economic Uncertainties Rise?

This year, the US dollar has dominated various rivals, including the Japanese yen, euro, and Chinese yuan, and analysts believe that the greenback's supremacy will not wane in the near term.

The Federal Reserve is the key driver of the dollar's increase, with policymakers aiming to limit economic expansion by targeting rising inflation with large interest rate hikes.

The Fed is expected to raise interest rates for the sixth time this year on Wednesday, lifting the Fed funds rate from 2.25% to 2.5%.

While the Fed is in the spotlight, investors' assessments of an economy's competitiveness can serve as a medium-term driver for currencies, according to Marc Chandler, managing director of Bannockburn Global Forex.

Shifts in the global trade environment and growth concerns are weighing on the dollar's rivals. The US Dollar Index has reached new highs in 20 years and is up 14% this year.

The Japanese Yen

The yen has fallen 24% versus the US dollar by 2022. The dollar recently reached 145 yen for the first time in 24 years.

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

Since 2016, the Bank of Japan has been tinkering with its yield curve in effort to promote inflation.

As a result of the Fed's aggressive rate campaign, the US 10-year Treasury yield has risen close to 3.5%, making the bonds more enticing compared to Japan's and weighing on the yen's value.

"Inflation has been difficult to generate in the Japanese economy... And now we may be seeing inflation accompanying wage growth, forcing the Bank of Japan to change policy sometime next year," Moya said.

The Bank of Japan will issue its next policy statement on Thursday.

Despite global central banks hiking interest rates (except China), Bank of America anticipates "no shift" in yield curve control.

The dollar will rise to 150 yen due to "rate differentials, fears of debasement, and capital flight," according to BofA.

Meanwhile, the world's third-largest economy, according to Chandler, is experiencing a negative terms of trade shock.

"The majority of Japan's food and energy are imported." Food and energy prices have risen far faster than prices for [its] manufactured goods.

As a result, Japan, like Europe, has gone from having trade surpluses to having trade deficits."

He added another explanation for the yen's weakness.

Euro

This year, the eurozone's shared currency has plummeted 13% versus the dollar, falling below parity for the first time since 2002, and could fall further.

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

Because of Russia's curtailment in gas exports to Europe, gas and energy costs have skyrocketed, causing the European Union to scramble to store gas before winter hits.

"The European economy is so poor, and growing costs are causing a recession." People are struggling to make ends meet." Fawad Razaqzada, a market specialist at Forex.com, speaks with Insider.

"It has increased energy input costs for businesses." Despite the [European Central Bank] hiking interest rates to manage inflation, sentiment toward the euro is relatively low." Inflation in the Eurozone reached a new high of 9.1% in August.

According to Moya, Europe's energy crisis may not be fully priced into the euro until the winter season, when it will be clear whether or not the region has sufficient energy supply.

"The weather will play a big role in this." Europe appears fragile... and the euro will struggle for the rest of the year."

Europe appears fragile... and the euro will struggle for the rest of the year."

Chinese Yuan This week, the yuan plummeted to a two-year low against the dollar, with the greenback rising above 7 yuan per dollar. China's currency has lost nearly 10% of its value this year.

As it prepares for the next Fed rate hike, the People's Bank of China has worked to provide upward support in recent weeks, including by fixing the currency's daily rate beyond market expectations.

On Friday, August retail sales and industrial production both topped expectations, but the yuan fell.

"Make no mistake about it, the Chinese economy is in trouble," Razaqzada warned. "Its zero-COVID policy saps the economy's growing momentum."

As long as the policy is in place, it's difficult to envisage a path out for yuan." He predicts that the dollar would soon hit 7.20 per yuan.

According to data released on Friday, sales and prices in China's property business, a crucial economic engine for the world's second-largest economy, declined as well.

Chandler said of the real estate market before the release of data, "Its cash register has broken down."

"What is the future development model, and how can the damage be minimized?" He claims that China must respond.