It’s been quite a rocky road for Forex traders these last few months, especially those trading the American Dollar. After gaining almost 20% since the beginning of the year, the Dollar Index lost more than 10% over the last three months. The American Dollar even recorded its worst-performing month in November in 12 years, down almost 5% over the month.
Before we look at the reasons why the American Dollar recorded its worst monthly performance in November 2022, remember to choose a regulated and reliable broker to trade the Forex market in a safe environment, like easymarkets.com.
The USD strongly increased at the beginning of the year 2022
There are different factors that supported the value of the USD at the beginning of the year, especially the Russian invasion of Ukraine and aggressive American monetary policy.
As soon as the conflict between Russia and Ukraine broke out, the value of the US dollar increased, as investors saw it as a reliable safe haven asset. In addition, the conflict in Russia isn’t having as much of an impact on the US economy as it does on others, such as Europe.
During periods of extreme market volatility or major geopolitical conflict, investors often seek refuge in the United States Dollar. The economy of the United States has indeed performed far better than that of other nations in these hard times.
In addition, the Federal Reserve stepped up the pace of its monetary tightening cycle in 2022, which contributed significantly to the USD’s robust support.
Investors are shifting their focus from investments in countries with lower interest rates to American investments in US Dollar, as the USD offers higher returns than investments in countries with lower interest rates. In order to finance their investments in the United States, investors need to purchase USD, which drives up demand for the currency and, as a result, drives up its price.
But the currency started losing ground over the last few months
As investors anticipate the Federal Reserve would slow the speed at which it raises interest rates in response to decreasing inflation, the American Dollar had a loss of more than 7% in the final quarter of 2022, and even posted its worst performance in 12 years during the month of November 2022.
According to the statistics provided by the Bureau of Labor Statistics, the consumer price index (CPI) for November increased by 7.1%, representing the lowest reading for CPI since December 2021, after 7.7% in October 2022 and 8.2% in September.
As a result, it would appear that the decisions made by the Fed have had some sort of effect on the inflation figures in the United States. Since inflation is decreasing, this may indicate that the Fed will reduce the rate at which it increases interest rates in the future – consequently, this has a negative impact on the value of the American dollar.
Depending on trader expectations, the value of the USD can keep going down in 2023 or bounce back. One thing is sure, volatility on the American Dollar will remain high next year.
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