One further leg higher before any reversal of USD strength – MUFG

The US dollar continued to strengthen sharply in September. Economists at MUFG Bank expect the greenback to remain strong for the rest of the year.

Equity markets to decline further before year-end

“We expect equity markets to decline further before year-end. A full drawdown of between 30% and 35% from the record high in January is feasible if global yields continue to move higher and US dollar strength persists. These conditions worsen the outlook, resulting in earnings downgrades which fuels further asset price declines and further US dollar strength.”

“With the Fed seemingly indifferent to US dollar strength and declining asset prices, it is clear the Fed is content to see tighter financial conditions play a role in driving inflation lower. Hence, we see US dollar appreciation being sustained through Q4 and only once there is a clear sense of the Fed pausing can we expect US dollar momentum to turn. We assume Q1 2023 will see the start of that.”