We believe that the USD has the potential to continue to gradually strengthen this year. We point out that even if the global economy manages to circumvent a full-scale recession, the asymmetry in central banks' reactions coupled with uninspiring economic growth rates indicates that investors are likely to maintain a defensive stance in the markets. Furthermore, the positive carry that the USD offers makes it an attractive option for investors.

The US Dollar is expected to offer approximately a 2% annual carry in the G10 through at least 2024.

We expect the JPY to lead gains in the G10, possibly even surpassing the USD. This is anticipated to be driven by narrowing rate differentials as further adjustments to the Bank of Japan’s yield curve control program coincide with long-end US yields moving closer to local rates. However, holding a short position in USD/JPY could be challenging due to the cost of carry eroding the projected spot return in its entirety.