Even with the specter of a recession looming over the global economy, the might of the US dollar remains strong and it stands to stay that way well into next year.

In September, the dollar peaked at its highest in nearly twenty years, rising a good 20% above several major currencies. But investors have adjusted their forecast for the dollar’s year-to-date gains by around half due to the possibility that the US Federal Reserve will soon be slowing down the interest rate hikes that have enabled the dollar to gain strength throughout much of this year.

What Made the Dollar so Strong This Year?

Aside from the Fed rate hikes, several other factors have bolstered the dollar this year.

For one thing, in light of economic uncertainty, investors opted to stick to the dollar as a shield against market volatility driven by practically everything from regional conflict in the Balkans to unrelenting inflation throughout the globe. 

Likewise, the dollar was seen as solid proof that the US economy remained relatively unfazed by crises, even as the European economy faltered under the ongoing energy crisis and China’s economic growth floundered under its unrelentingly strict anti-COVID measures.

Indeed, even with the adjustment of the dollar’s gains, 2022 stands to become the currency’s best year in nearly a decade.

What Do the Experts Have to Say?

The Bank of America (BofA) Global Research group recently conducted a survey among fund managers, many of whom referred to the dollar as the market’s most crowded trade for the past five consecutive months as of November. Likewise, an overwhelming majority of participants opined that the dollar was overvalued this year.

Meanwhile, news and information agency Reuters conducted its own poll among 66 foreign exchange strategists. Based on the results, experts believe that the dollar is expected to trade at its current level around this time next year, even if central banks across the globe impose new policies that could hamper economic growth. Such policies would further boost the dollar’s appeal as an economic haven.

Potential Repercussions

However, experts warn that a rampaging dollar could severely hamper the competitiveness of US exports to the global market and adversely impact American multinationals operating overseas when they exchange earnings in local currencies for dollars.

With the S&P 500’s foreign exposure currently pegged at 30%, BofA experts believe that multinationals in the technology and materials industries will be the hardest hit if the dollar remains strong.