Our 2023 outlook for currencies

The US dollar is likely coming off a major peak, suggesting a decline in 2023 (12- month projection at USD1.10 per euro). But we see scope for a rebound in the US dollar in the next few months (three-month projection at USD1.00 per euro). 

An economic downturn in major economies coupled with central banks keeping financial conditions tight may favour defensive currencies such as the Japanese yen. Recent signs of policy normalisation in Japan could prove to be another key supportive factor, explaining our revised 12-month projection to JPY125. 

On the contrary, cyclical currencies, including EM currencies, could underperform in the first part of 2023 before outperforming when the worst of the economic slowdown has passed.