The dollar's blistering rally is almost over as support from US economic outperformance is fading, Societe Generale says

The dollar's blistering rally is almost over as support from US economic outperformance is fading, Societe Generale says
Counting US dollar notes at a bank in Jiangsu Province, China.CFOTO/Future Publishing via Getty Images
  • The rally in the US dollar this year is likely to be closer to an end and headed toward "trendless trading," Societe Generale said Thursday.
  • The "drivers of economic outperformance are fading" for the greenback, which has risen to a 20-year high against key rivals.

The dollar this year has surged to 20-year highs, but the bounce looks headed toward an end in the face of waning US growth prospects, Societe Generale said Thursday.

The greenback has been a standout asset in 2022 as it trounces rivals including the Japanese yen, the euro, and the British pound. The US Dollar Index, which tracks the dollar against those currencies and three others, has gained 17% this year in charging up to levels not seen since 2002.

The Federal Reserve's trade-weighted dollar index has advanced by nearly 10% this year. The so-called broad index gauges the greenback's value against the currencies of 26 major US trading partners.

"So far, US rates have risen further and faster than elsewhere, on the back of economic out-performance," Kit Juckes, macro strategist at Societe Generale, said in a note. "But the drivers of economic out-performance are fading. That means we are close to the end of the dollar's long rally and moving to a phase of trendless trading."

The US economy had found support from fiscal and monetary stimulus in the wake of the COVID outbreak. As well, the country's standing as the world's second-largest energy producer provided a cushion as other countries have been slammed by higher gas prices after Russia launched its war against Ukraine.


But as the Fed works to cool inflation by tamping down economic activity, investors are also watching for the world's largest economy to enter into a recession next year. The "US growth outlook matters more for the dollar going forwards than where US bond yields go next," said Juckes.

In fact, the countdown to a US recession has started following the inversion of the 3-month and 10-year US Treasury yield curve, research firm TS Lombard said this week. Separately, 91% of US CEOs and 86% of CEOs running the world's largest companies expect a recession in the next 12 months, according to a KPMG survey released last month.

A meandering dollar is "likely to last for some time, before other economies' economic prospects improve, at which point the dollar will start to fall back," SocGen's Juckes said.

The dollar this year has benefitted from a jump in US interest rates as the Federal Reserve battles scorching inflation by jacking up borrowing costs. Fed Chairman Jerome Powell said Wednesday it was "very premature" for the US central bank to start thinking of pausing rate hikes but indicated it may start reducing the size of them.

As the Fed has tightened, climbing US Treasury yields relative to other sovereign bond yields has bolstered dollar demand among holders of other currencies. The 10-year Treasury note yield this year has risen above 4% for the first time since 2008.


Meanwhile, worries about broader global growth were on display Thursday with the British pound dropping against both the dollar and the euro after the Bank of England raised its key interest rate by 75 basis points for the first time in 33 years. UK inflation is running at more than 10% and the BoE estimated the UK will be in recession until the middle of 2024.

"Raising rates into an economic downturn isn't necessarily currency friendly," Juckes said ahead of the BoE's policy decision.