COVER STORY 2022 in Currency hedging approaching the peak for US interest rates and the Bank of Japan decides its zero-rate policy has gone on long enough , traders could rush to repay their yen loans , driving the currency sharply higher against the dollar . “ Over the past year , our Japanese investments have been a drag on performance , but we suspect they , and the yen , will have a better year in 2023 ,” he continues . “ Similarly , we think the dollar is now expensive and that US equities are a bit too popular a place to hide from the problems of the past couple of years . In a modest way , our funds are underweight US assets and overweight Japanese and UK assets .
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Mark Dragten , head of discretionary FX at Insight , says that while timing turning points in currency markets is no easy task , there are three reasons why the pound could rise against the dollar this year .
1 . First , the dollar is expensive on a historical basis . “ Traditional measures suggest it is at valuations only seen during the Volcker era , when the Federal Reserve raised interest rates to 20 %,” Dragten explains .
“ The dollar is now more highly valued than during the tech boom , when markets speculated that then president Bill Clinton could repay all US government debt .”
2 . Second , excitement at Fed hikes may have peaked : with the US economy softening , monetary tightening appears to be working . “ This makes it unlikely the Federal Reserve will need to hike meaningfully beyond what markets are pricing in , and the pace of hikes is expected to become less aggressive , tapering to a peak by mid- 2023 ,” Dragten adds .
3 . Finally , pessimism towards the UK may also have peaked . At the start of last year , the UK was expected to grow in line with other developed markets in 2023 , but this outlook has deteriorated . “ Consensus forecasts project a gap of more than 1 percentage point ,” Dragten adds . “ Markets are poorly positioned for positive surprises .”
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