The U.S. dollar is facing a prolonged period of weakness after losing its status as the preferred currency during times of turbulence, clearing the path for the gold bulls, according to a new prognosis issued by Pacific Investment Management Co (PIMCO).
Global strategist, Gene Frieda says that the U.S. dollar benefited from a range of geopolitical and economic factors in 2022, including Russia’s invasion of Ukraine and the threat of recession. This generated safe-haven appeal for the dollar and hemmed in gold prices but, that’s all changing as 2023 gets underway.
“We expect the USD will continue to lose its appeal as the safe-haven currency of last resort,” Frieda stated. “We believe risk premiums will decline as inflation – and monetary policy volatility decline.
“While higher yields clearly worked in the dollar’s favour last year, any forward-looking view must also take into account how the dollar was buoyed by the shocks of 2022 – the Russia-Ukraine war, the spike in energy prices, and inflation – and the extent to which they may abate in 2023. PIMCO believes the dollar, which has depreciated since hitting a 20-year peak last September, is likely to fall further in 2023 as inflation falls, recession risks decline, and other shocks abate.”
On Wednesday, Federal Reserve chairman Jerome Powell acknowledged that inflation levels are now starting to fall for the first time, leading to speculation that the Feds may be about to press pause on the monthly rate hikes cycle.
This decline in inflation levels is a key point working against the dollar and in favour of the gold bulls. PIMCO expects that the next rate increase will be a relatively minor one, and could be the last one we see for a while. It anticipates the next announcement will confirm a 25 basis points increase, which is far below the 75 and 50 base point hikes we have experienced to date. When that happens, the dollar will see its advantage diminished, with Frieda saying, “Given the faster pace of cumulative rate hikes on the way up, the USD’s yield advantage is likely to fall in the early stages of a rate-cutting cycle.”
When the dollar weakens, expect gold prices to spike. Don’t delay. Buy now.
