How much more can the dollar rise in 2022? James Lord, Global Head of Foreign Exchange and Emerging Market Strategy for Morgan Stanley, believes that the greenback could be close to peaking.

Good time to start to reduce dollar long positions

“We believe that the US dollar could be close to peaking. In fact, we've just changed our dollar call to neutral, which means we think it will just go sideways from here – after being bullish the dollar since June last year.”

“The Fed has indicated it may be close to raising interest rates, and we think that the Fed starting an interest rate hiking cycle could be a signal that the dollar's rise is close to finished. The US dollar tends to rise in the months before lift-off, but fall in the months afterwards. This is a great example of buying the rumor and selling the fact. And if the market is right and the Fed hikes rates as soon as March, the peak of the US dollar for this cycle may not be too far away.”

“What we've seen recently is that other central banks are also starting to think about tightening policy and raising interest rates, which will, to some extent, offset Fed hikes – reducing their impact on the dollar.” 

“We think this may be a good time for investors to start to reduce their dollar long positions, not add to them.”