The Japanese yen, the euro, and the Chinese yuan have all been crushed this year by the US dollar, and analysts on the foreign exchange market predict that this trend will continue in the near future.
The Federal Reserve, whose policymakers are combating high inflation with significant interest rate hikes to impede economic growth, is the main factor driving the dollar's increase.
On Wednesday, the Fed is anticipated to raise rates for the fifth time this year, raising the federal funds rate over its current range of 2.25% to 2.5%.
While the Fed is in the spotlight, Marc Chandler, managing director at Bannockburn Global Forex, said investors' perceptions of an economy's competitiveness can influence currencies in the medium term.
In this regard, changes in the nature of international trade and worries about economic development are causing the dollar's competitors to weaken. The US Dollar Index has increased by 14% this year and reached 20-year highs.
In 2022, the yen has fallen a startling 24% against the dollar. Recently, the dollar crossed the 145-yen threshold for the first time in 24 years.
According to Edward Moya, senior market analyst at Oanda, the yen trade has been "fascinating" as a result of the Bank of Japan's commitment to bond purchases to maintain its 10-year yield cap at 0.25%.
Since 2016, the BOJ has been manipulating its yield curve to raise inflation. The US 10-year Treasury yield has increased to about 3.5% as a result of the Fed's aggressive rate campaign, making US bonds more appealing than Japanese ones and depreciating the value of the yen.
"Inflation has been a challenge for the Japanese economy. And now that wage growth and inflation may be coexisting, the Bank of Japan may decide to alter its course of action at some time in the upcoming year "said Moya.
The next policy statement from the BOJ is coming on Thursday. Despite interest rate increases by most central banks worldwide (apart from China's), Bank of America sees "no budging" on yield curve control. According to BofA, "rate differentials, fears of depreciation, and capital flight" will cause the dollar to increase to 150 yen.
The third-largest economy in the world is presently dealing with a negative terms-of-trade shock, according to Chandler.
"The majority of Japan's food and energy are imported. Food and energy costs have increased far more quickly than those of its produced items. So, like Europe, Japan has gone from having trade surpluses to having trade deficits "He added, pointing out another another issue harming the yen.
The common currency of the eurozone has fallen 13% against the dollar this year, falling below parity for the first time since 2002, and may still fall more. For both the fourth quarter of 2022 and the first quarter of 2023, Barclays predicts a price of $0.9800. On Friday, it was traded for $0.9950.
The European Union is rushing to stockpile gas before winter arrives as a result of Russia's reduction in gas deliveries into Europe, which has driven up gas and energy prices.
"Because of how bad the economy in the eurozone is and the fact that prices are growing, the economy is slowing down. People are having a hard time making ends meet, "According to Insider, Fawad Razaqzada is a market analyst at Forex.com. "It has increased the cost of energy intake for enterprises.
Despite the [European Central Bank] raising interest rates in accordance with its responsibility to manage prices, sentiment toward the euro is still extremely low." Inflation in the eurozone reached a record high of 9.1% in August.
Until the winter, when it will be more obvious if the region has enough energy supply or not, the whole cost of Europe's energy dilemma may not be factored into the euro, according to Moya.
"The weather will have a significant impact on that. Europe appears to be in danger, which will make the rest of the year difficult for the euro."
With the currency breaching above 7 yuan to the dollar this week, the yuan fell to a two-year low. This year, China's currency has decreased by over 10%.
As it gets ready for the upcoming Fed rate hike, the People's Bank of China has been working to provide upside support in recent weeks, in part by fixing the currency's daily rate beyond market expectations.
Retail sales and industrial production for August both exceeded expectations in the economic figures released on Friday, although the yuan declined.
Without a doubt, the Chinese economy is in trouble, according to Razaqzada. "The economy's economic momentum is weakened by its zero-COVID policy.
It will be extremely challenging to envision a solution for yuan as long as the policy is in place." He predicts that the dollar would shortly rise to 7.20 per yuan.
The data released on Friday also revealed a decline in sales and prices in China's real estate market, a crucial economic driver for the second-largest economy in the world.
Before data was available, Chandler remarked of the real estate market, "Its cash register has broken down." China must answer the questions, he added, "What's the next developmental model, and how can you reduce the damage?"