(Bloomberg) – Buying the dollar, selling almost any other currency can be the mantra for investors as the new year approaches.

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The greenback is expected to post its biggest annual gain in six years and its rally looks far from over, according to market participants. The main driver: a hawkish Federal Reserve that has established a roadmap for interest rate hikes over the next three years, while other central banks appear much more reluctant to withdraw their stimulus measures.

“The general strength of the dollar – this is what you need to prepare for,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Commodity currencies could be sold harder, and emerging markets will also come under pressure even if their central banks raise rates. This will not be enough to compensate for what the Fed is likely to do. “

Investor positioning on the dollar and opinions on the currency have become the most bullish since 2015, according to a survey by Bank of America Corp. published this month. The greenback strengthened against all of its Group of 10 peers in 2021, with the Bloomberg Dollar Spot Index rising 5.7% over the period to trade near its highest since July 2020.

There is also a precedent for multi-year gains, with the dollar’s gauge rising for four consecutive years through 2016, for a combined gain of 28%.

Major falls

While the Bloomberg dollar index closed 0.2% lower on Wednesday after the Fed’s move was broadly in line with market consensus, investors believe such declines will likely be short-lived.

Sumitomo Mitsui DS Asset Management Co. favors the greenback over the yen, saying the dollar will outperform as the Bank of Japan strives to normalize monetary policy amid low inflation.

“I see the Fed starting to reduce its balance sheet in 2023, which is supporting the dollar,” said Kei Yamazaki, senior fund manager at Sumitomo Mitsui DS Asset in Tokyo. “The normalization of the Fed’s policy is justified by the American economic growth which exceeds the others. I expect the dollar to strengthen further given the Fed’s policy. “

The story continues

While markets are already factoring in the Fed’s multiple rate hikes, there is still room for additional hawkishness to integrate, according to National Australia Bank Ltd. In contrast, the euro and pound are expected to be pulled down by rising energy prices and an accommodating European Central Bank, the bank said.

“The risk in 2022 is that we get four hikes instead of three” from the Fed, which will strengthen the strength of the dollar, said Rodrigo Catril, senior currency strategist at NAB in Sydney. “We see the risk that the Euro is trading below $ 1.10 and the Pound below $ 1.30.”

More vulnerable

Fund managers are betting the dollar will also remain in an uptrend against most emerging currencies, arguing that rising US yields are likely to weigh on current account deficits in many developing countries.

The MSCI Emerging Currency Index has seen a saw move this year and currently has not changed much over the period, with the strength of the Israeli Shekel and Chinese Yuan being offset by the fall in the Turkish Lira and Argentine Peso. .

Read more: Wave of rate hikes is no cure for FX weakness in emerging markets

While a dollar-buying spree is not Scotiabank’s base scenario, Singapore strategist Qi Gao considers the currencies of India, Korea and Thailand to be among the most vulnerable. “For the rupee, it is facing capital outflows and a rebound in oil prices,” he said.

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