In 2022, the best performing currency was the US Dollar, which outcompeted the whole of the market. This was largely due to the Federal Reserve consecutively increasing interest rates for 8 months and then again in July. The US Dollar was also supported by the currency’s safe haven status as the stock market crashed and most economists predicted a recession. The Swiss Franc was largely driven by its status as a safe haven and was the second-best performing currency.
In 2023, the best performing currencies are equally the Swiss Franc and the Pound. The Swiss Franc does not come as a surprise to most market participants. However, the UK in January 2023 was at the highest possibility of a recession compared to its partners. Therefore, why has the Pound outperformed the Euro, Yen and Canadian Dollar?
The Pound – “The Underdog”
The Pound rose in value against the US Dollar by 5.05% and rose by 2.12% against the Euro. From the major currency pairs categories, the Pound was the second best performing after the Swiss Franc. The main reason for the Pound increasing in value is the Bank of England’s monetary policy stance and the economy outperforming expectations.
The Bank of England’s base rate has risen to 5.25%, whereas the European Central Bank has increased interest rates to 4.5%. Therefore, the Bank of England is currently 75 basis points higher than its European partners. In addition, the BoE is currently predicted to be the least likely to cut interest rates in 2024. Economists are expecting both the Federal Reserve and the European Central Bank to cut interest rates in the first half of 2024. The Eurozone’s inflation is currently 2.9%, only 0.9% higher than their inflation target. Whereas the UK is still looking at inflation above 4.6%. Therefore, the UK is further away from its goal and has a higher need to hold its policy unchanged.
In addition to this, the UK economy has grown 1.3% so far this year, whereas economists were previously pricing in a recession. Due to the change in the economic outlook, investors are pricing the market differently and altering their portfolios. This week the Bank of England Deputy Governor advised that interest rates should remain tight for a “long time to ensure victory over the growth of inflation,”. The fact he does not see a reason to lower interest rates is comforting for investors within the Pound.
According to economists, currencies are now trading away from the Dollar which is supporting the Swiss Franc, Euro and the Pound. Investors and institutions increased their exposure to the Dollar in 2022, but now see a lesser need to do so. If the GBPUSD increases above 1.27320, the Pound will continue to obtain buy signals from technical analysis. If it fully corrects back to the average of the past 8 years, the exchange rate will continue to rise to 1.30000.
Swiss Franc – The Best-Performing Currency of 2023!
As previously mentioned, the Swiss Franc is the best performing currency of 2023. This is largely due to the market’s confidence in the central bank and the country’s economy. Switzerland has managed to bring inflation down from the recent high of 3.4% to 1.7%. Economists believe the country is at a lower risk of a recession and of inflation rising again. The Swiss Gross Domestic Product has risen for the fourth consecutive year; it was worth $807.71 billion in 2022 and is believed to have grown again in 2023.
In addition to this, the SNB is expected to drop interest rates at a lower pace compared to the ECB and the Federal Reserve. Lastly, with the Swiss Franc, investors have the benefits of a less dovish central bank and still investing in a safe haven asset.
The Swiss Franc has risen against all currencies and is performing best against the Japanese Yen. Against the Yen the CHF has risen 28% in 2022 and 2023. If the USDCHF declines below 0.87430, the exchange rate is likely to witness further signals that the Swiss Franc will continue to appreciate in the medium term.
Summary:
- The Swiss Franc is the best performing currency of 2023. This is largely due to the market’s confidence in the central bank and the country’s economy.
- Economists believe the country is at a lower risk of a recession and of inflation rising again. The Swiss Gross Domestic Product has risen for the fourth consecutive year.
- The Bank of England’s base rate has risen to 5.25%. However, the European Central Bank has increased interest rates to 4.5%.
- According to economists, currencies are now trading away from the Dollar which is supporting the Swiss Franc and Pound. Investors and institutions increased their exposure to the Dollar in 2022, but now see a lesser need to do so.
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Michalis Efthymiou
Market Analyst
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2023 has been predicted to be a significant year for the global currency market, as two specific currencies are projected to dominate the market. These two currencies have already been gaining momentum and are expected to continue their upward trend in the coming years. In this article, we’ll take a closer look at these currencies and why they are expected to be the top players in the market in 2023.
But first, let’s understand what currency dominance means. It refers to the level of use and influence a certain currency has over others in the market. This can be determined by various factors such as its value, stability, and global demand. Now, let’s dive into the top two currencies predicted to dominate the market in 2023.
1. US Dollar (USD)
The US Dollar has been a dominant force in the global currency market for decades, and it shows no signs of slowing down. In fact, experts predict that by 2023, the USD will still hold its position as the most widely used currency in the world. This is due to the strong economy of the United States, which has the largest GDP in the world. The strength of the economy has a direct impact on the value of the currency, making the USD a stable and secure investment option.
There are also several other factors that contribute to the USD’s dominance in the market. These include its widespread use as a reserve currency, its high liquidity, and its status as the primary currency for international trade. In addition, many commodities such as oil and gold are priced in USD, making it a crucial currency for global transactions.
2. Chinese Yuan (CNY)
The Chinese Yuan has been gaining momentum in the global currency market in recent years, and it is expected to continue its growth in the coming years. In 2023, it is projected to be the second most dominant currency globally. This is due to China’s growing economic influence and its increasing efforts to internationalize the Yuan.
China has the second-largest economy in the world and has been making significant investments in its infrastructure and technology. This has led to a rise in the value of the Yuan, making it an attractive currency for global investors. The Chinese government has also been promoting the use of the Yuan in international trade, which has further increased its demand and relevance in the market.
Furthermore, China has been signing numerous bilateral agreements to settle trade deals in Yuan, rather than in USD. This is a significant step towards the internationalization of the Yuan, and it is expected to have a positive impact on its dominance in the market.
Why These Two Currencies Will Dominate
Aside from the individual strengths of the USD and CNY, there are some common factors that contribute to their predicted dominance in 2023. These include:
1. Stability and Security – Both the USD and CNY are backed by strong and stable economies, making them a safe investment option for global investors.
2. Global Demand – These currencies have a high level of global demand, as they are widely used in international trade and serve as reserve currencies.
3. Technology and Innovation – The US and China are both leaders in technology and innovation, making their currencies attractive to investors seeking long-term growth potential.
4. Geopolitical Influence – The political power and influence of these two nations play a significant role in their currency dominance, as it affects global confidence and trust in their currency.
Final Thoughts
As we approach 2023, it is safe to say that the US Dollar and Chinese Yuan will be the top two currencies dominating the global market. However, the currency market is highly volatile, and unforeseen events can always alter the predicted trends. Therefore, it is crucial for investors to stay informed and keep a close eye on currency fluctuations to make wise investment decisions.
Investing in the USD or CNY can bring numerous benefits to investors, such as stability, liquidity, and the potential for long-term growth. However, it is essential to diversify investments and not rely entirely on one currency. Diversification helps mitigate risks and allows for a more balanced and secure investment portfolio.
In conclusion, the US Dollar and Chinese Yuan are expected to hold their positions as the top two currencies dominating the market in 2023. Their strong economic foundations and global influence make them reliable and attractive investment options for both individuals and businesses. As always, it is essential to stay informed and consult with a financial advisor to make informed investment decisions.
