U.S. Dollar to Keep Losing Appeal as Safe-Haven Currency

• PIMCO, a $1.74 trillion asset management firm, expects the USD to „continue to lose its appeal as the safe-haven currency of last resort“ in 2023.
• PIMCO Strategist Gene Frieda claimed that risk premiums will decline and shocks may abate, leading to a further decline in the value of the USD.
• Frieda also noted that higher yields worked in favor of the dollar but its yield advantage is likely to fall during an expected rate-cutting cycle.

PIMCO’s Prediction for U.S. Dollar

Pacific Investment Management Company (PIMCO), one of the world’s largest asset management firms with $1.74 trillion in assets under management as of Dec. 31, 2022, has warned that the US dollar is likely to “continue to lose its appeal as the safe-haven currency of last resort” this year. The firm’s global strategist Gene Frieda made this prediction in a blog post last week citing declining inflation, decreasing recession risks and dissipating shocks as contributing factors. He added that while higher yields worked in favor of the dollar last year, any forward-looking view must also take into account how these shocks may abate in 2023 and consequently lead to a fall in its value even if it sustains relatively high yields over time.

Factors That May Reduce U.S. Dollar’s Appeal

According to PIMCO’s analysis, several factors are likely to reduce US dollar’s appeal as a safe haven currency:

• Inflation: The Federal Reserve has been pumping liquidity into markets by reducing interest rates over time which has caused inflationary pressures within economies globally including that of USA and hence reducing USD’s appeal.
• Risk Premium: With a decrease in inflationary pressures and monetary policy volatility associated with it, risk premiums are expected by PIMCO strategists to decline further making other currencies more attractive than USD.
• Shocks: As per Frieda’s predictions various unexpected events such as Russia Ukraine war or spike in energy prices have acted favorably for USD but these are expected not only fade away but reverse their impacts going forward resulting in a lower demand for Greenbacks from investors worldwide.

PIMCO’s Expectation on Yield Advantages

The executive vice president at PIMCO also stated that given an increased rate hikes earlier on coupled with expectations of an upcoming rate cutting cycle soon; US dollars yield advantage is likely going be significantly reduced over time compared against other developed countries currencies making it less attractive than before.

Conclusion

It can be concluded from above analysis that due various macroeconomic conditions along with various geopolitical events currently taking place across globe; US dollar is less likely retain it status quo being considered as safe haven currency by investors worldwide going forward rather is more prone towards depreciation against other major fiat currencies hence causing reduction investor confidence among them .