U.S. dollar
- The U.S. Dollar Index (DXY) climbed higher during the third quarter. A resilient U.S. economy coupled with an expectation for higher U.S. interest rates fostered support for the dollar, highlighting U.S. optimism relative to other major currencies.
- We expect the DXY to range-trade at current levels, or slightly higher, through year-end, supported by a more resilient U.S. economy compared to conditions in Europe, Japan, and the BRICS (Brazil, Russia, India, China, and South Africa) nations.
Developed currencies
- A stronger dollar and deteriorating European data by quarter-end contributed to the euro slipping below 1.08, a level it traded above for most of the quarter. We believe that the euro will remain near current levels, as the European Central Bank should keep rates higher for longer to tackle inflation in the region.
- Disappointed expectations of an early Bank of Japan policy change, coupled with an uptick in U.S. rate expectations saw the yen decline below 145 late in the quarter, its weakest level since late 2022. A continued cooling of a China recovery euphoria and the weaker yuan also weighed on the yen.
Emerging currencies
- The dollar’s appreciation also affected emerging market (EM) currencies. Continued declines in the yuan dragged Asian and other commodity-linked currencies broadly lower.
- We expect that EM currencies may follow the dollar’s range trading in the fourth quarter. We do not foresee yuan weakness extending much further; higher rates in EM countries may offer better support than for developed market (DM) counterparts.