U.S. Dollar Has Strong Start to 2023

The U.S. dollar gained against nearly all its major peers as trading kicked off in 2023 after a seasonal holiday lull.

The Japanese yen was the only Group of 10 (G-10) currency to strengthen against the greenback, with the Norwegian krone, euro, and Swiss franc all falling sharply. That pushed the Bloomberg Dollar Spot Index up as much as 0.9 percent, putting it on track for its best day since mid-December.

Traders said the moves were exacerbated by thin liquidity. But it was also a reminder that the dollar’s decline in recent months—which is broadly expected to keep going this year—will not be a one-way move.

“From a rebalancing perspective, the U.S. dollar ended the year a bit overdone,” said Geoff Yu, senior currency strategist at Bank of New York Mellon. That implies “a bit of recovery flow happening, almost by default.”

The Bloomberg dollar index fell about 8 percent from late September through the end of the year, as traders slashed long-dollar positions after a strong rally earlier in the year, driving the currency to its worst quarterly performance in more than a decade. While Yu sees further weakness, he’s “highly skeptical” that the Federal Reserve can cut interest rates this year, which could help temper a longer-term drop.

Traders will scour new data this week for clues on the state of the U.S. economy. Signs were building last year that an aggressive cycle of rate hikes was starting to bring down red-hot inflation, though wage gains remain strong, suggesting that rates may remain high for longer.

In this year’s early trading, the Norwegian krone fell the most against the greenback, declining 2.2 percent. The euro and the Swiss franc each lost more than 1 percent. The yen bucked the trend to advance, reflecting bets on tighter policy from the Bank of Japan after its surprise December decision to tweak its yield curve control settings.

“Long JPY remains a favored trade at the beginning of 2023,” said Antony Foster, head of G10 spot trading in EMEA at Nomura International Plc. “Speculative and model accounts are the main traders, but there are often wild moves at the start of the year.”

The yen strengthened 0.1 percent, to 130.7, after earlier appreciating nearly 1 percent to the strongest since early June. With Japanese financial markets still shut for new-year holidays, currency flows doubled since the London open, according to Ian Tew, head of G-10 currency spot trading for EMEA at Barclays Plc.

“We’re looking at an uncertain 2023, and many macro themes will dictate market narratives—today feels like an unwind of short-term December positions, rather than anything fundamental to start the year,” Tew said. “The overwhelming flow has been for yen calls in the option space, but we have also seen dollar demand from hedge funds.”

—With assistance from Libby Cherry & Anya Andrianova.

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